CO 


GIFT  OF 


F,  K   TU.J:t^-^ 


LABORATORY  MANUAL 

THEORY  AND  PRACTICE 
OF  ACCOUNTING 


^ 


Fayette  H.  Elwell  B.  A,  C.  P.  A. 

PROFESSOR  OF  ACCOUNTING 
THE  UNIVERSITY  OF  WISCONSIN 


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PREFACE 

From  the  problems  and  questions  presented  in  this 
set  are  selected  those  which  comprise  the  greater  portion 
of  the  laboratory  work  for  the  course  in  Theory  and 
Practice  of  Accounting  given  in  the  Course  in  Com- 
merce, University  of  Wisconsin.  This  set  supplements 
the  laboratory  material  contained  in  the  texts  and  as- 
signed readings. 

The  first  division  of  this  set  consists  of  some  original 
problems  and  of  many  others  selected  from  the  Certified 
Public  Accountant  examinations  given  in  the  different 
states  and  from  the  Intermediate  and  Final  examinations 
given  in  England.  The  solution  of  these  problems  fur- 
nishes practice  in  the  application  of  principles  given  in 
the  lectures. 

The  theory  questions  given  in  the  second  division  of 
the  set  are  used  in  recitations  and  discussions.  As  indi- 
cated, many  of  these  questions  have  been  selected  from 
Certified  Public  Accountant  examinations. 

F.  H.  Elwell. 
September  1,  1920.  &• 


^-34480 


Digitized  by  the  Internet  Archive 

in  2008  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/accounttheoryOOelwerich 


]PART  i 


PROBLEM  1 

(Adapted  from  Wisconsin,  1915.) 

Classify  and  group  the  following  accounts  of  a  manufacturing  company 
according  to  kind  of  asset,  liability,  proprietary  interest,  income  and  expense : 


1.  Accounts  Payable  35. 

2.  Accounts  Receivable  36. 

3.  Accrued  Interest  on  Bonds  Issued 

4.  Accrued  Salaries  and  Wages  Zl . 

5.  Advertising  38. 

6.  Bad  Debts  Written  Off  39. 

7.  Bills  Payable  40. 

8.  Bills  Receivable  41. 

9.  Bond  Discount  on  Bonds  Purchased     42. 

10.  Bond  Premium  on  Bonds  Issued  43. 

11.  Capital  Stock  44. 

12.  Cash  45. 

13.  Credit  Department  Expenses  46. 

14.  Depreciation   of   Buildings,   Machin-  47. 

ery  and  Plant  48. 

15.  Depreciation     of    Workmen's    Cot-  49. 

tages  50. 

16.  Directors'  Fees  51. 

17.  Discount  on  Purchases  52. 

18.  Discount  on  Sales  53. 

19.  Federal  Income  Tax 

20.  First  Mortgage  Bonds  54. 

21.  Freight  and  Cartage  Inward 

22.  Freight  and  Cartage  Outvv^ard  55. 

23.  General  Office  Expenses  56. 

24.  Good  Will  57. 

25.  Insurance  58. 

26.  Insurance  Premiums  Unexpired  59. 

27.  Interest  on  Bills  Payable  60. 

28.  Interest  on  Bonds  Issued  61. 

29.  Income  from  Investments  62. 

30.  Inventory,  Raw  Materials  63. 

31.  Inventory,  Goods  in  Process  64. 

32.  Inventory,  Manufactured  Goods  65. 
2)Z.  Investments  (Outside)  66. 
34.  Maintenance  of  Buildings,   Machin-  67. 

ery  and  Plant  68. 


Maintenance  of  Workmen's  Cottages 

Manufacturing   Power,   Heat  and 
Light 

Miscellaneous  Factory  Expenses 

Miscellaneous  Selling  Expenses 

Non-Productive  Labor 

Office  Equipment 

Office  Salaries 

Officers'  Salaries  and  Expenses 

Organization  Expenses 

Patent  Rights 

Patterns  and  Drawings 

Plant  Site 

Plant  Buildings 

Plant  Machinery  and  Equipment 

Productive  Labor 

Purchasing  Department  Expense 

Raw  Materials  Purchased 

Rent  of  Workmen's  Cottages 

Reserve  for  Depreciation  of  Buildings, 
Machinery  and  Plant 

Reserve    for    Depreciation    of    Work- 
men's Cottages 

Reserve  for  Doubtful  Accounts 

Reserve  for  Sinking  Fund 

Returns  and  Allowances,  Purchases 

Returns  and  Allowances,  Sales 

Sales  of  Manufactured  Goods 

Sales  of  Waste  Materials 

Sales  Agents'  Commissions 

Salesmen's  Salaries 

Salesmen's  Expenses 

Sinking  Fund  Investments 

Surplus 

Taxes  on  Plant  and  Equipment 

Taxes  Accrued 

Workmen's  Cottages 


PROBLEM  2 

(Wisconsin,  May,  1919.) 

Classify  the  accounts  properly  recording  the  following  items  according  to 
the  subdivision  of  assets,  liabilities,  proprietary  interest,  income  and  expenses, 
under  which  they  should  be  grouped : 


1.  Expenses  Advanced  Salesmen  6. 

2.  Wages    Due    Workmen   and    Office 

Staff  7. 

3.  Organization  Expenses  8. 

4.  Organization  Expenses  Written  Off  9. 

5.  Reserve  for  Depreciation  on  Build-  10. 

ings 


Reserve  for  Income  and   Excess 

Profits  Taxes 
Property  Taxes 

Income  and  Excess  Profits  Taxes 
Sinking  Fund  for  Bond  Redemption 
Reserve  for  Sinking  Fund 


11. 

Cash  Discount  on  Merchandise  Pur- 

18. 

chases 

19. 

12. 

Cash  discounts  on  Merchandise  Sales 

20. 

13. 

Interest  on  Invested  Capital 

14. 

Dividends  Declared 

21. 

15. 

Dividends  Payable 

16. 

Notes  Receivable  Discounted 

22. 

17. 

Trade  Acceptances 
(a)   Given 

23. 

(b)  Received 

24. 

(c)  Discounted 

25. 

Premium  on  Bonds  Issued 
Discount  on  Bonds  Purchased 
Amortization  of  Premium  on  Bonds 

Issued 
Amortization  of  Discount  on  Bonds 

Purchased 
Returned  Sales 
Wages   Paid   Workmen   and   Office 

Staff 
Maintenance  of  Workmen's  Cottages 
Income  from  Stocks  and  Bonds  Owned 


PROBLEM  3 


(Wisconsin,  November,  1919) 

Classify  and  group  the  following  accounts  according  to  kind  of  asset, 
liability,  proprietary  interest,  income  and  expense : 


Interest  Collected  in  Advance 

Sinking  Fund 

Notes  Receivable  Discounted 

Treasury  Stock 

Work  in  Progress 

Dividends  Unclaimed 

Capital  Stock  Subscription 

Suspense  Accounts  Receivable 

Discount  on  Bonds  Issued  Written  Off 

Accrued  Property  Taxes 

Accrued  Income    and    Excess    Profits 

Taxes 
Interest  Accrued  on  Notes  Receivable 
Interest  Accrued  on  Bonds  Payable 
Reserve  for  Sinking  Fund 
Reserve  for  Bad  Debts 
Merchandise  Purchases 
Sales'  Returns  Allowances 


Reserve  for  Building  Extensions 

Bonds  Payable 

Interest  Earned  on  Liberty  Bonds 

Interest  Paid  on  Liberty  Loan  Installments 

Reserve  for  Depreciation,  Buildings 

Dividends  Declared 

Dividends  Payable 

Investments  in  and  Advances  to  Companies 
for  Purposes  of  Control 

Advances  to  Company  Officials 

Insurance  Premiums  Paid  by  Company  on 
Life  of  its  President  (in  which  the  Com- 
pany is  Beneficiary) 

Installment  Payments  by  Employes  on  Lib- 
erty Bonds  Bought  for  Them  by  Com- 
pany 

Liberty  Bonds  Bought  for  Employes 

Employes'  Liberty  Bond  Subscription 


PROBLEM  4 

(Wisconsin,  May,  1919) 
The  following  asset  accounts  appear  upon  the  books  of  the  Wisconsin 


State  Normal  Schools : 

Land 

Land  Improvements 

Structures  and  Attached  Fixtures 

Machinery  and  Equipment 

Educational  Apparatus 


Furniture  and  Furnishings 
Live  Stock  and  Poultry 
Library  Books 
Text  Books 
Museum  Specimens 


Indicate  the  account  or  accounts  to  which  each  of  the  following  items 
should  properly  be  charged : 


(a)  Canary  for  Kindergarten  Dept. 

(b)  Sidewalk 

(c)  Office  Desk 

(d)  Log  Chain 

(e)  Tractor 

(f)  Shrubbery 
Piano  for  Music  Dept. 
Cream  Separator 


(g) 
(h) 


(i)   Ford  Automobile 

(j)   Cinders  for  Track 

(k)  Test  Tubes 

(1)   Copy  of  Wis.  Statutes 

(m)  Adding  Machine 

(n)   Cash  Register 

(o)   School  Manual 


PROBLEM  5 
(Wisconsin,  May,  1919) 

The  State  Fair  division  of  the  Department  of  Agriculture  has  three  appro- 
priations as  follows : 

1.  Operation — for  the  ordinary  ever  recurring  expenses  of  the  department. 

2.  Capital — for  the   acquisition   of  permanent   property,   such   as   lands, 
buildings,  equipment,  etc. 

3.  Maintenance — for  the  keeping  of  permanent  property  in  a  condition 
suitable  for  use  and  occupancy. 

In  the  following  cases,  indicate  the  appropriation  to  be  charged  with  the 
expenditures  mentioned : 

(a)  A  new  team  is  purchased  to  replace  a  team   struck  by   lightning. 
The  value  of  the  old  and  new  team  is  the  same. 

(b)  Ticket  booth  for  War  Exhibit. 

(c)  Oil  for  roads  on  fairground. 

(d)  Bunting. 

(e)  Free  Exhibition, 

(f)  Special  Electric  Arches  for  Illuminating  Purposes. 

(g)  Sewer  Pipe. 

(h)     Flowers  and  Shrubs, 
(i)      Whitewash, 
(j)      Exhibit  Signs. 


PROBLEM  6 

I,  (a)     State  whether  each  of  the  following  accounts  is  a  liability  ac- 
count, a  valuation  account,  or  a  proprietary  interest  account: 

1.  Reserve  for  Depreciation. 

2.  Reserve  for  Extensions. 

3.  Reserve  for  Bad  Debts. 

4.  Reserve  for  Contingencies. 

5.  Reserve  for  Inventory  Adjustment. 

6.  Reserve  for  Sinking  Fund. 

(b)     Discuss  the  accuracy  of  the  terminology  employed  in  each  of  the 
above  account  names.     (Wisconsin,  1917.) 

II.  In  the  balance  sheet  of  a  company,  as  prepared  by  the  secretary,  you 
find  the  following  items : 

Under  "Capital  Assets." 

(a)  Factory  real  estate,  buildings,  plant  and  machinery. 

(b)  Real  estate  held  for  investment. 

(c)  Investments  in  and  advances  to  another  company  for  purposes  of 

control. 

(d)  Franchises  having  a  fixed  term. 
Under  "Current  Assets." 

(e)  Company's  treasury  stock  (carried  at  50  cents  on  the  dollar). 

(f)  Raw  material,  finished  product  and  inventory  of  office  supplies 

and  stationery. 

(g)  Advances  to  officials  of  the  company  (unsecured). 

(h)     Insurance  premiums  paid  by  the  company  on  a  policy  on  the 


life  of  the  company's  president,  in  which  the  company  is  bene- 
ficiary, 
(i)      Due  to  customers, 
(j)      Sinking  fund  investments, 
(k)     Unexpired  fire  insurance  premium. 
(1)      Cash  in  bank  and  on  hand. 
Discuss  the  correctness  or  otherwise  of  the  above  classification  of  items 
under  capital  and  current  assets,  giving  reasons  for  your  opinions,  and  criticis- 
ing the  items  generally.     (Missouri,  1915.) 


PROBLEM  7 
(Wisconsin,  May,  1919) 

(a)  State  the  revenue  account  or  section  of  the  operating  (or  income) 
statement  in  which  each  of  the  following  items  would  be  placed  in  general 
accounting  practice. 

(b)  State  the  treatment  given  each  of  the  items  under  the  Revenue  Act 
of  1918,  i.  e.,  if  an  income  item  state  whether  it  is  to  be  included  in  calculating 
gross  income,  and  if  an  expense  item,  state  whether  it  is  allowable  as  a  deduc- 
tion. 

Note:  The  examinee  must  first  decide  whether  each  item  mentioned 
should  be  included  in  an  operating  (or  income)  statement. 

1.  Contributions  to 

(a)  Relief  and  charitable  organizations. 

(b)  Hospitals. 

(c)  Political  campaign  fund. 

(d)  Fund  to  promote  certain  legislation. 

(e)  City  convention  fund. 

2.  Expenses  of  the  president  of  the  company  attending  the  national  and 
the  state  trade  conventions. 

3.  Loss  through  enforced  sale  of  Liberty  Bonds. 

4.  Expenses  incurred  in  advertising  Liberty  Bonds  and  War  Savings 
Certificates. 

5.  Taxes  and  assessments  as  follows :  State  Income  Tax ;  Federal  In- 
come and  Excess  Profits  Tax ;  Real  Property  Tax ;  Street  Paving  Assessment ; 
Street  Repaving  Assessment. 

6.  Insurance  premium  on  life  of  the  company's  president. 

7.  Loss  suffered  on  salvaged  property  in  excess  of  depreciation  reserve 
created  to  date. 

8.  Profit  on  goods  manufactured  on  order  and  held  for  future  shipment. 

9.  Interest  paid  on 

(a)  Bonds  outstanding. 

(b)  Bank  Loans. 

(c)  Liberty  Bond  Installments. 

(d)  Scrip  Dividends. 

10.  Profit  on  donation  of  treasury  stock  (par  value.  $10,000;  market 
value,  $5,000)  sold  within  the  year  for  $5,500. 

11.  Rent  of  factory  building  ($2,000  per  year)  paid  to  a  corporation  in 
which  your  client  owns  $10,000  of  the  $100,000  capital  stock. 

12.  Rent  for  $75  per  month  for  a  warehouse.  On  July  1,  1918,  the  com- 
pany purchased  the  warehouse  property  for  $6,000.    A  cash  payment  of  $2,000 

8 


was  made,  and  the  company  was  to  pay  the  balance  at  the  rate  of  $75  per 
month. 

13.  Depreciation  which  the  corporation  figures  on  the  following  items 
at  the  stated  rates: 

(a)  Brick  factory  building,  6%%. 

(b)  Brick  office  building,  5%. 

(c)  Machinery  Equipment,  12^%. 

(d)  Automobile  Trucks,  33>^%. 

14.  A  premium  of  $2,000  received  from  the  sale  of  $100,000  of  the  corpora- 
tion's bonds. 

15.  An  item  of  $2,000  for  the  replacement  of  a  portion  of  an  old  machine. 

16.  An  item  of  $200  incurred  in  removing  a  discarded  machine  to  make 
room  for  a  new  machine. 

17.  Expenses  of  officials  paid  in  visiting  the  corporation's  properties  in 
Buenos  Aires. 

18.  Gifts  to  members  of  the  Board  of  Directors. 

19.  Salary  of  $10,000  to  the  vice-president  of  the  corporation. 

20.  Interest  on  invested  capital. 


PROBLEM  8 
(Missouri,  1913) 

Following  is  a  list  of  the  accounts  appearing  on  the  Trial  Balance  of 
a  Manufacturing  Company,  which  deals  in  finished  merchandise  purchased,  as 
well  as  in  its  own  products.  From  this  list,  and  without  using  figures,  draw 
up  plans  of  Financial  Statements  (Balance  Sheet,  Manufacturing  Account, 
Profit  and  Loss  Account,  etc.),  in  the  form  which  you  think  most  suitable: 


Accounts  Payable 

Salaries,  Management 

Capital  Stock 

Notes  Receivable 

Cash 

Notes  Payable  (partly  secured  by  deed  of 

trust) 
Salaries,  Office  and  Store 
Real  Estate 
Fuel 

Insurance  (Plant) 
Light 

Freight  (on  Merchandise  Purchased) 
Machinery  and  Tools 
Freight  (on  Raw  Material) 
Buildings 

Sales  (own  products) 
Inventory  (own  products) 
Inventory  (raw  materials) 
Inventory  (partly  manufactured  goods) 
Inventory  (merchandise  purchased) 
Inventory  (repair   supplies) 
Undivided  Profits  (end  of  last  year) 
Purchases  (merchandise) 
Sales  (merchandise  purchased) 
Rent,  Factory 
Rent,  Store  and  Office 
Printing  and  Stationery 


Accounts  Receivable 
Horse,  Wagon  and  Harness 
Stable  Expense 
Advertising 

Purchases  (raw  materials) 
Machinery  Repairs 
Productive  Labor  (factory) 
Labor  (warehouse) 
Office  Furniture 

Reserve,  Uncollectible  Accounts 
Reserve  for  Depreciation 
Insurance  (merchandise) 
Uncollectible  Accounts 
Salesmen's  Expenses  and  Salaries 
Management  Salary,  Office 
Discounts  on  Sales  (own  product) 
Interest  Payable 

Depreciation — Buildings,    Machinery,    Wag- 
ons and  Harness 
Sundry  Factory  Expenses 
Sundry  Office  Expenses 
Postage 

Subscriptions  and  Donations 
Discounts  on  Purchases  (merchandise) 
Rents,  Income 

Insurance  Paid  in  Advance,  Plant 
Insurance  Paid  in  Advance,  Merchandise 
Management  Salary,  Factory 


9 


PROBLEM  9 

(Adapted  from  Michigan  Examination,  1908) 

The  following  figures  are  taken  from  the  books  of  the  Fairview  Manu- 
facturing Company  of  New  York  City,  on  the  31st  of  December,  1907: 

Inventory  of  Finished  Goods  (January  1) $     3,684.57 

Inventory  of  Raw  Material  (January  1) 11,392.70 

Purchases  of  Raw  Materials 62,519.85 

Sales    ......; 217.387.42 

Wages    109,317.88 

Rent    19,500.00 

Discounts  Received    on    Purchases 375.60 

Discounts  Allowed  on  Sales 186.36 

Power,  Light  and  Heat 8,710.64 

Light  and  Heat  for  Office 168.00 

Repairs  1,090.00 

Packing   2,017.00 

Factory  Expense    3,270.00 

General  Expense    5,230.00 

Factory  Insurance   1,050.00 

General  Insurance   750.00 

Machinery  and   Plant 12,350.00 

Tools    2,600.00 

Commissions  Paid   7,642.00 

Office   Salaries    9,700.00 

Salesmen's  Salaries   8,930.00 

Interest  on  Loans 440.00 

Loans   Payable 22,000.00 

Discount  Lost  120.00 

Notes  Receivable 130,000.00 

Notes   Rec.   Disc 8,000.00 

Notes   Payable    ; 19,500.00 

Accounts  Receivable 101,026.00 

Accounts   Payable    30,020.00 

Office  Furniture   1,100.00 

Furniture  and  Fixtures 1,950.00 

Cash   on   Hand 1,825.00 

Cash   in   Banks 26,467.00 

Returned  Sales   276.00 

Capital    200,000.00 

Reserve  for  Depreciation 3,236.98 

Reserve  for  Bad  Debts 5,727.00 

Freight  and  Cartage,   Inward 727.00 

Stable  Expenses 2,750.00 

Horses,  Wagons  and  Harnesses 8,500.00 

Postage  and  Express 1,250.00 

Superintendence    3,500.00 

Taxes 250.00 

Goodwill    10,000.00 

Stationery  and   Printing 1,080.00 

Advertising   8,630.00 

Surplus    (1906)    63,753.00 

You  are  requested  (a)  to  prepare  from  them  a  trial  balance,  arranging 
the  accounts  according  to  the  system  used  in  laboratory;  (b)  to  draft  journal 
entries  for  closing  the  books ;  (c)  the  proper  revenue  accounts  in  statement 
form ;  (d)  to  certify  your  results  by  a  balance  sheet,  the  items  of  which  are 
arranged  in  the  order  used  in  presenting  such  statements  to  bond  houses  for 
an  issue  of  mortgage  bonds. 

Notations :  The  following  items  are  to  be  taken  into  consideration  before 
preparing  the  statement  asked  for: 

10 


Raw  Materials    $  16,250.00 

Finished   Goods    9,386.00 

Tools    2,000.00 

Office  Furniture   1,000.00 

Furniture  and  Fixtures 1,500.00 

Stationery  and  Printing 300.00 

Allow  for  depreciation :  On  machinery  5  per  cent.  On  horses,  wagons 
and  harness  10  per  cent. 

Reserve  1  per  cent,  of  the  sales  for  bad  debts.  The  item  of  rent,  $19,500, 
is  to  be  apportioned  as  follows :  Fifty-three  per  cent,  for  factory,  22  per  cent, 
for  salesrooms,  and  25  per  cent,  for  office. 

The  item  of  superintendence,  $3,500,  is  to  be  divided  }i  to  factory  and  ^ 
to  general  expense. 


PROBLEM  10 
(Ohio,  1916) 

At  the  close  of  its  fiscal  year,  December  31,  1915,  the  Trial   Balance  ot 
The  Nau-Pace  Company  was  as  follows : 

Real   Estate    $   225,000.00 

Fixed   Machinery    150,000.00 

Movable   Equipment    18,000.00 

Shaftings,   Pulleys,    Etc 10,500.00 

Stable   Equipment    3,500.00 

Office    Equipment    2,915.90 

Drawings  and  Patterns 9,000.00 

Patents  75,000.00 

Capital  Stock  $    500.000.00 

First  Mortgage  Bonds 100,000.00 

Profit  and   Loss 

Surplus   86,140.28 

Dividends    300.00 

Interest  on   Bonds 5,000.00 

Other  Interest   Paid 1,323.10 

Interest    Received    2,469.50 

Cash   Discount   on   Purchases 13,389.52 

Cash   Discounts  on   Sales 2,861.50 

Sales    1,540,816.75 

Return  Sales    8,258.25 

Cash    27,750.65 

Bills  Receivable    50,750.00 

Accounts    Receivable    298,650.25 

Raw   Materials    622,190.90 

Finished  Goods.  January  1,   1915 62,735.06 

Goods  in  Process,  January  1,  1915 24,747.27 

Fuel    38.688.28 

Insurance    4,000.00 

Taxes    5,000.00 

Bills  Payable   • 40,000.00 

Accounts   Payable    46,585.85 

Reserve  for  Depreciation: 

Machinery  and   Equipment 50,000.00 

Buildings    30,000.00 

Patents   22,058.80 

Bad  Accounts    6,240.75 

Salaries,  Officers  and  Clerks   (General) 56,150.00 

General    Office    Supplies 2,950.75 

Postage,  Telegraph  and   Phone 1,560.00 

Miscellaneous  General  Expenses 850.00 

Advertising  35,000.00 

11 


Salaries  and  Expenses,   Salesmen 72,350.31 

Agents'  Commissions 30,141.40 

Credit  Department  Salaries 7,560.00 

Miscellaneous   Expenses,   Selling 610.00 

Stable  Expenses  3,963.46 

Direct  Labor   (Mfg.) 508,311.39 

Indirect  Labor  (Mfg.) 44,981.01 

Superintendence,  Factory   6,000.00 

Factory  Supplies    8,547.18 

Repairs,  Machinery  and  Equipment 7,418.52 

Repairs   of   Buildings 2,860.47 

Power,  Heat  and  Light 2,875.80 

$2,438,001.45     $2,438,001.45 

You  are  to  take  into  consideration  the  following  facts : 

L  Real  Estate,  Machinery  and  other  Factory  equipment,  and  Patents 
are  stated  at  cost. 

2.  Of  the  Real  Estate  $25,000  is  for  Land  and  $200,000  is  for  Buildings. 

3.  All  Capital  Stock  authorized  has  been  issued  and  is  outstanding. 

4.  Allowances  for  depreciation  are : 

Machinery  and  Factory  Equipment $  15,000.00 

Buildings,  3%  on  cost 
Patents,  l/17th  of  cost 

5.  $15,000  is  to  be  set  aside  as  a  reserve  for  bad  accounts. 

6.  Ten  per  cent,  of  the  book  values  of  Stable  Equipment  and  Office 
Equipment,  and  %  oi  the  book  value  of  Drawings  and  Patterns  are  to  be 
charged  off. 

7.  Inventories  at  the  close  of  the  fiscal  year  were : 

Raw  Materials $  63,580.40 

Finished   Goods    58,864.56 

Goods  in  Process  27,024.52 

Fuel    4,823.43 

Factory  Supplies   1,525.00 

Office  Supplies   500.00 

Prepaid  Insurance  500.00 

8.  The  accruals  are : 

Taxes    $    7,000.00 

Direct  Labor  12,618.75 

Indirect  Labor    2,040.50 

Interest  on  Bonds 1,000.00 

Advertising 4,718.50 

9.  The  depreciation  on  Stable  Equipment  (see  item  6)  is  to  be  charged 
to  Stable  Expenses,  and  ^  of  the  latter  is  apportioned  to  Manufacturing 
Expenses  and  ^  to  Selling  Expenses. 

10.  The  cost  of  Fuel  used  is  to  be  charged  to  Power,  Heat  and  Light. 
IL     Maintenance  of  Real  Estate  is  to  be  charged  with  cost  of  repairs  to 

Buildings,  depreciation  on  Buildings,  20%  of  Taxes  for  the  year,  and  $1,000 
.for  insurance.  The  total  cost  of  such  maintenance  is  to  be  shown  as  an  item 
of  manufacturing  expense  on  the  statement  of  Cost  of  Sales. 

12.  The  portion  of  Insurance  remaining  after  charging  Maintenance  of 
Real  Estate  is  to  be  allocated  to  manufacturing  expenses. 

13.  Thirty  per  cent,  of  the  Taxes  for  the  year  is  to  be  apportioned  to 
manufacturing  expenses  and  50%  is  to  be  charged  against  income. 

14.  Of  the  salaries  of  Officers  and  Clerks,  General,  $3,600  should  be  appor- 
tioned to  selling  expenses. 

15.  Amongst  the  Bills  Receivable  is  a  note  for  $5,000  pertaining  to  a 

12 


previous  fiscal  year,  which  is  considered  to  be  worthless.     No  provision  was 
made  for  such  loss. 

16.  Regardless  of  theory,  cash  discounts  on  purchases  and  sales  are  to 
be  treated  as  pertaining  to  income. 

17.  On  the  10th  of  December,  1915,  a  dividend  of  10%  on  the  Capital 
Stock  was  declared  and  made  payable  on  January  10th,  1916,  for  which  no 
entry  was  made  prior  to  taking  off  the  Trial  Balance. 

Given  the  foregoing  information,  you  are  asked  to  prepare  the  following 
statements  in  approved  form  for  the  information  of  your  clients : 

1.  Cost  of  Sales. 

2.  Profit  and  loss,  showing  (a)  the  gross  profit  and  the  per  cent,  of  same 
on  sales ;  (b)  selling  expenses  and  per  cent,  of  same  on  gross  profits ;  (c) 
general  expenses  and  the  percentage  that  such  expenses  bear  to  gross  profits ; 
and  (d)  the  net  profits  and  the  per  cent,  of  same  on  sales. 

3.  Balance  Sheet,  showing  the  Surplus  at  the  beginning  of  the  fiscal  year, 
and  the  amount  at  the  close  of  the  year. 

PROBLEM  11 
(Massachusetts,  1917) 

The  following  is  a  Trial  Balance  before  closing  of  the  second  year  on 
June  30,  1917: 

DEBITS 

Treasury   Stock    (XTrustee) $  35,000.00 

Real   Estate    200,000.00 

Buildings    300,000.00 

Machinery   and    Equipment 150,000.00 

Materials  (Inventory,  June  30,  1916) 65,000.00 

Finished   Goods  do 158,000.00 

Accounts    Receivable    320,000.00 

Purchases   of  Materials 305,000.00 

Labor    132,800.00 

Operating  Expenses,  Repairs,  etc 121,500.00 

Sinking  Fund  Trustee 25,000.00 

Discount  on  Donated  Stock  sold  from  the  Treasury  by  Trustee  25,000.00 

Cash    74,837.50 

Discount  on  Bonds  sold  July  1,  1915 25,000.00 

Bond  Interest   12,500.00 

General  Expenses    17,500.00 

Insurance  Unexpired  June  30,   1916 3,000.00 


$1,970,137.50 
CREDITS 

Capital  Stock  Issued $  500,000.00 

1st  Mortgage  5%  Bonds 250,000.00 

Accounts   Payable    40,000.00 

Reserve  for  Sinking  Fund  (Bonds) 25,000.00 

Premium  on  Capital  Stock 50,000.00 

Sales  of  Finished  Goods  (Net) 915,000.00 

Surplus  on  Donated  Stock 60,000.00 

Reserve  for  Depreciation  of  Buildings 6,000.00 

Reserve  for  Depreciation  on  Machinery  and  Equipment 11,362.50 

Reserve  for  Bad  Debts  (Balance) 650.00 

Reserve  for  Replacements   15,000.00 

Bond  Interest  Accrued 3,125.00 

Taxes  Accrued   9.000.00 

Unappropriated  Surplus  June  30,  1916 85,000.00 


$1,970,137.50 


13 


You  are  required  to  adjust  the  accounts,  and  prepare  (a)  Certified  Balance 
Sheet ;  (b)  Profit  and  Loss  Account  for  the  year ;  (c)  Surplus  Account. 

The  following  information  is  given : 

Inventory  June  30,  1917,  Materials $  52,000.00 

Goods  in  Process  at  Cost 105,000.00 

Finished  Goods  at  Cost 137,000.00 

1.  Bonds  mature  in  10  years  from  July  1,  1915,  the  interest  being  pay- 
able in  April  and  October  of  each  year.    Bonds  were  sold  at  90. 

2.  Depreciation  on  Buildings  is  estimated  to  be  2  per  cent,  annually. 

3.  Depreciation  on  Machinery  and  Equipment  is  estimated  at  7^^  per 
cent,  yearly. 

4.  A  Reserve  for  Bad  and  Doubtful  Debts  was  set  up  on  June  30,  1915, 
to  the  amount  of  $3,000,  against  which  the  bad  debts  written  off  during  the 
fiscal  year  were  charged.  Create  a  Reserve  for  the  coming  year  of  1  per  cent, 
on  Accounts  Receivable. 

5.  According  to  the  Company's  By-Laws  all  replacements  are  to  be 
made  from  Revenue.  During  the  year  a  machine  valued  at  $6,000  was  re- 
moved and  replaced  by  a  similar  machine  costing  $10,000,  which  sum  was 
charged  to  "Operating  Expense  Repairs,  etc."  The  discarded  machine  was 
afterwards  sold  for  $1,500  and  this  sum  was  credited  to  Machinery  Account. 

6.  The  Trustee  of  the  Sinking  Fund  Investments  reports  that  he  re- 
ceived $1,250  of  income  during  the  year.  He  is  to  be  paid  the  amount  in  cash 
which  is  credited  to  the  Sinking  Fund  Reserve. 

7.  The  Insurance  was  paid  on  July  1,  1915,  for  a  period  of  three  years. 

8.  Taxes  were  charged  as  $3,000  monthly  to  "Operating  Expenses"  and 
"Taxes  Accrued"  credited  therewith.  The  Taxes  paid  during  the  year  were 
$27,000.    The  tax  year  ends  March  31st. 

9.  The  Treasury  stock  was  donated  and  has  been  all  sold.  Dividend 
of  10  per  cent,  declared  on  June  30th,  payable  July  15,  1917. 


PROBLEM  12 
(Adapted  from  English  Final  Examination,  May,  1912) 

A,  B  and  C  carry  on  business  in  partnership  as  gas  engine  dealers  and 
repairers,  their  business  being  divided  into  two  parts:  (1)  Engine  Depart- 
ment, (2)  Repair  Department.  The  following  were  the  Ledger  Balances  on 
31st  of  December,  1910: 

Engines — Purchases  and   Freight $  40,000.00 

"            Fitters,  Wages  and  Expenses 7,500.00 

Stock,  12/31/09   10,000.00 

Sales    60,000.00 

Repairs— Purchases 25,000.00 

Stock,   12/31/09   4,000.00 

Wages  and  Expenses 10,000.00 

Sales    50,000.00 

Accounts  Receivable   20,000.00 

Accounts   Payable    11,200.00 

Salaries    2,500.00 

Rent  and  Taxes 1,500.00 

Fuel  and  Light 250.00 

Insurance — Fire  and   Workmen's    Compensation 700.00 

Life  Policy— Surrender  Value.   12/31/09 1,500.00 

Life  Insurance  Premium 175.00 

Bank  Interest  and  Commission  (Dr.) 100.00 

14 


Office  Expenses   600.00 

Discount  (Dr.)    1,250.00 

Office  Furniture   750.00 

A,  Drawing  Account   (Dr.) 500.00 

B,  "                  "          (Dr.) 600.00 

C,  "                   "          (Cr.) 1.000.00 

C,  Loan  Account  (at  5  per  cent) 2,500.00 

A,  Capital  Account 2,500.00 

B,  •'                •'        2,500.00 

C,  "                " 2,500.00 

Cash  in  Hand 125.00 

Cash  at   Bank 5,150.00 

Stocks,  31st   December,    1910:     Engines 10,500.00 

Repairs 4,750.00 

Surrender  value  of  life  policy  31st  of  December,  1910,  $1,625.  Interest  on 
capital  at  5  per  cent,  per  annum.  The  profits  were  divided :  A  7/20,  B  6/20, 
C  7/20. 

Make  out  a  trading  account  for  each  of  the  two  departments,  and  the 
firm's  profit  and  loss  account  for  1910.  and  balance  sheet  as  on  31st  of  Decem- 
ber, 1910. 


PROBLEM  13 
(Adapted  from   English   Final   Examination,   November,    1910) 

On  December  31,  1909,  the  Trial  Balance  of  the  Jones  Garage  Company 
was  as  follows : 

300  Shares  Common  Stock,  $100  each $  30,000.00 

Good   Will    $  12,750.00 

Garage    7,500.00 

Machinery  and  Tools 500.00 

Fixtures  and  Fittings 100.00 

Taxicabs    2,500.00 

Sundry  Debtors    12,500.00 

Stock  of  Accessories,  December  31,  1909 1,250.00 

Cash   at   Bank 5,275.00 

Sundry  Creditors 765.00 

Reserve  for  Bad  Debts,  December  31,  1908 400.00 

Accessories,  including  Tires  and  Tubes  (used) 10,000.00 

Gasoline,  Oil,  etc.   (used) 2,750.00 

Cost  of  Repairing  Cars  (Wages  and  Materials) 3,750.00 

Charges  to  Customers  for  Repairing  Cars 4,000.00 

Expenses  of  Taxicabs 1,000.(X) 

Wages    600.00 

Sales  of  Accessories,  including  Tires  and  Tubes....  13,250.00 

Cars  Purchased  for  Re-sale 55,000.00 

Sales  of  Gasoline,  Oil,  etc 3,750.00 

Sundry    Receipts     (Washing    Cars,     Charging    Bat- 
teries, etc.)   425.00 

Car   Sales    60,000.00 

Management   Expense    2,250.00 

Garage   Rents    225.00 

Repairs,    Paint,   etc 90.00 

Bad  Debts  Written  off 250.00 

Freight  on  Cars  Sold 400.00 

Surplus   4,000.00 

Charges  to  Customers  for  Taxicabs 1,650.00 

$118,465.00    $118,465.00 

Depreciation  is  to  be  written  oflf  on :     Machinery  and  Tools  at  the  rate 
of  20  per  cent..  Fixtures  and  Fittings  10  per  cent.,  Taxicabs  25  per  cent. 

15 


Reserve  2  per  cent,  of  total  sales  for  bad  debts. 

Prepare  complete  accounts  in  the  form  which,  in  your  opinion,  is  calcu- 
lated to  give  the  greatest  amount  of  information  to  the  Directors  as  to  the 
working  results  of  the  business  at  a  glance. 


PROBLEM  14 
(Wisconsin,  1916) 

a.     What  is  the  amount  of  the   net  working  capital   in   the   following 
balance  sheet? 

Balance  Sheet  January  1,  1915 

Real  Estate   $  10,000.00           Capital  Stock   $  50,000.00 

Patents    8,000.00            Bonds  20,000.00 

Buildings    55,260.00            Notes   Payable    10,000.00 

Cash    9,320.00            Reserve  for  Bad  Debts 5,350.00 

Inventories   32,600.00           Accounts  Payable   32,502.00 

Interest  Prepaid 1,600.00  Reserve       for       Depreciation, 

Accounts  Receivable    40,200.00               Buildings    20,000.00 

Surplus    19,128.00 


$156,980.00  $156,980.00 

b.     What  is  the  amount  of  the  net  working  capital  in  the  balance  sheet 
of  the  same  company  as  of  January  1,  1916,  which  here  follows? 

Balance  Sheet  January  1,  1916 

Real  Estate  $  17,000.00           Capital  Stock   $  50,000.00 

Patents    7,000.00            Bonds    30,000.00 

Buildings  68,520.00            Notes   Payable    20,000.00 

Cash    3,260.00            Reserve  for  Bad  Debts 6,240.00 

Inventories   38,710.00           Accounts  Payable   25,620.00 

Interest   Prepaid    820.00  Reserve       for       Depreciation, 

Accounts   Receivable    42,200.00               Buildings  35,200.00 

Surplus    10,450.00 


$177,510.00  $177,510.00 

Profits  as  per  Profit  and  Loss  account  for  the  year  amounted  to  $6,322.00 
and  a  30  per  cent,  dividend  was  declared  and  paid. 

c.  Submit  a  statement  accounting  for  the  increase  or  decrease  in  the 
working  capital. 


PROBLEM  15 

I.  Considering  all  the  following  items  as  cash  in  drawer,  the  cash  count 
on  January  5,  1917,  agrees  with  the  cash  book  balance.  What  comment  would 
you  make  in  your  report  relative  to  each  item? 

(a)  A  check  signed  by  John  Jones,  pavable  to  the  cashier,  dated  June  1, 

1916. 

(b)  A  slip  with  the  following  notation :     "John  Smith,  janitor,  January 

wages  advanced   $22.00."    (Signed)    John    Smith.     The   janitor's 
salary  is  $80.00  per  month. 

(c)  A  check  payable  to  cash  signed  by  the  cashier,  $10.00. 

(d)  A  receipted  express  bill  of  $5.87. 

(e)  A  slip  of  paper  with  the  notation  "Postage  stamps — $25.00." 

16 


(f)  A  certificate  of  deposit  made  out  in  favor  of  the  cashier  for  $400. 

(g)  A  bill  against  a  customer  for  $19.80  on  which  there  appears  the  nota- 

tion "will  pay  on  the  31st."    You  find  that  the  customer  has  been 
given  credit  for  the-  payment  of  this  invoice  on  the  ledger, 
(h)     A  slip  of  paper  with  the  following  notation — "I.  O.  U.  $10.     John 

Doe."     (Wisconsin,  1917.) 
II.     In  auditing  the  cash  of  a  certain  company  as  at  January  1,  1918,  you 
find  that  the  cash  drawer  balance,  which  is  reported  as  $200.00,  consists  of  the 
following  items : 

(a)  Currency  and  Coin $122.50 

(b)  Postage  Stamps   (received  from  customers  in  payment  of  small  balances 

and  cashed  from  drawer) 17.50 

(c)  A  Slip  Inscribed  "I.  O.  U.  $20.00,  J.  B.  S." 20.00 

(d)  Check  Payable  to  "Cash,"  signed  by  the  cashier  and  dated  August  2,  1917. .  28.00 

(e)  A  Slip  Inscribed  "Butter  and  Eggs  for  Mr.  Steele"  (the  General  Manager)  3.00 

(f)  A  Receipted  Express  Bill  for  charges  on  a  motor  received  from  The  Elec- 

tric  Co.     You   are   informed   that   this   motor    should   have   been   sent 
prepaid   9.00 

Total  $200.00 

In  preparing  your  balance  sheet,  what  amount  would  you  enter  as  cash  on 
hand  and  what  disposition  would  you  make  of  items  not  included  therein? 
(Ohio,  1918.) 


PROBLEM  16 
(Wisconsin,   1918) 

(a)  Define  a  trade  acceptance  and  summarize  its  advantages  to 

1.  The  seller. 

2.  The  buyer. 

(b)  Under  what  account  or  accounts  should  be  recorded 

1.  Trade  acceptances  received. 

2.  Trade  acceptances  given. 

3.  Trade  acceptances  discounted. 

(c)  Would  you  advise  a  client  to  accept  a  trade  acceptance  for  a  renewal 
of  one  unpaid  at  maturity? 

(d)  May  a  partial  payment  be  made  upon  a  trade  acceptance?     If  so, 
what  would  be  the  entry  to  record  it? 

(e)  Does  the  rule  prohibiting  banks  from  loaning  more  than  10  per  cent, 
of  their  capital  and  surplus  to  any  one  borrower  apply  to  trade  acceptances? 


PROBLEM  17 
(Wisconsin,  1918) 

(a)  Previous  to  examining  the  accounts  of  a  corporation  at  the  end  of 
its  first  fiscal  year  you  find  that  Notes  Receivable  stands  in  the  financial 
statement  prepared  for  the  banker  at  $5,500. 

Upon  investigation  it  is  disclosed  that  $20,000  of  notes  from  customers 
were  received  during  the  period,  and  that  $10,000  of  these  notes  were  duly 
paid  in  full  by  the  customers  to  the  company  at  maturity,  and  $5,000  of  the 
notes  were  discounted  at  the  bank.    Of  the  notes  discounted,  a  note  for  $500 

17 


given  by  Brown  &  Company  was  not  paid  when  due,  and  has  been  charged 
back  to  the  Notes  Receivable  Account.  Notes  to  the  amount  of  $1,500  are 
not  yet  due  at  the  bank. 

Partial  payments  have  been  made  to  the  company  to  the  extent  of  $500  on 
notes  still  due  and  these  payments  have  been  credited  to  an  account  called 
Partial  Payments  on  Notes  Receivable.  This  item  is  listed  in  the  financial 
statement  as  a  liability. 

A  customer's  note  of  $1,000  is  found  to  have  been  given  as  collateral  for 
the  payment  of  a  note  of  the  company  discounted  at  the  bank. 

A  30  day  note  given  by  an  officer  of  the  company  for  $200  is  treated  as  a 
cash  item.    The  note  is  60  days  past  due. 

You  are  asked  to  give  the  journal  entry  or  entries  for  obtaining  the 
proper  account  or  accounts  to  record  the  above  facts,  and  to  give  such 
comments  as  you  would  consider  appropriate  to  include  in  your  report  relative 
to  these  items. 


PROBLEM  18 

(Wisconsin,  1918) 

In  examining  the  accounts  of  a  corporation  you  find  that  the  Accounts 
Receivable  were  stated  as  $216,100.00  in  a  financial  statement  already  prepared 
by  the  company's  bookkeeper  and  handed  to  a  banker.  Upon  examining  the 
accounts  you  find  that  this  amount  is  made  up  of  the  following  items : 

Trade  Accounts  Receivable $175,000.00 

Advances  on  Merchandise   Purchased 5,000.00 

Cash  Advanced  to  Officers 10,000.00 

Unpaid  Subscriptions  to  Capital  Stock 8,500.00 

Advances  to  Traveling  Salesmen  for  Expenses 350.00 

Consignees'  Accounts   (full  selling  price  of  goods  shipped  on  consignment, 

credited   to   sales) 7.500.00 

Claims  against  Railroad  and  Express   Companies 1,750.00 

Investments  in  Other  Companies 8,000.00 

Although  the  controlling  account  with  Accounts  Receivable  stands  debited 
with  $175,000  in  the  general  ledger,  you  learn  that  the  sum  of  the  individual 
debit  balances  in  the  sales  ledger  is  $190,000,  and  that  the  sum  of  the  individ- 
ual credit  balances  in  the  sales  ledger  amounts  to  $15,000.00. 

(a)  You  are  asked  to  criticize  the  treatment  of  these  items,  stating  such 
adjustments  as  it  would  be  advisable  to  make  in  preparing  the  operating 
and  financial  statements,  and  to  show  exactly  how  the  several  items  should 
appear  in  the  financial  statement. 

(b)  Would  you  recommend  that  a  corrected  copy  of  the  financial  state- 
ment be  given  the  banker? 

(c)  Assume  that  upon  further  investigation  you  discovered  that  the 
company  had  not  charged  oflf  any  accounts  as  bad  debits  during  the  six  years 
that  it  has  been  in  business,  and  that  no  provision  has  been  made  for  absorb- 
ing such  losses  through  a  Reserve  for  Bad  Debts  account. 

Outline  procedure  for  verifying  the  accuracy  of  the  accounts,  and  for 
classifying  them  according  to  the  possibility  of  collection.  Give  .such  a  state- 
ment as  you  would  include  in  your  certificate  to  cover  this  condition  of 
aflfairs. 

18 


PROBLEM  19 

(Wisconsin,  1918) 

In  checking  the  inventory  sheets  and  ledger  accounts  dealing  with  ma- 
terials you  found  that  the  following  errors  had  occurred : 

December  31,  1916.  An  item  of  $500  was  added  to  inventory  sheet  after 
totals  had  been  obtained  and  was  not  entered  in  the  ledger  account. 

December  31,  1916.  An  error  of  $1,000  in  adding  the  inventory  extensions 
resulting  in  an  overstatement  of  the  inventory  by  this  amount. 

December  31.  1917.  An  error  is  made  in  valuing  one  lot  of  material,  the 
result  of  which  is  an  overstatement  of  the  inventory  value  to  the  amount  of 
$2,000. 

December  31,  1917.  An  error  of  $10,000  in  footing  the  inventory  exten- 
sions, resulting  in  an  understatement  of  the  ledger  inventory  value  by  this 
amount. 

December  31,  1917.  An  invoice  of  $4,000  for  materials  just  received  in- 
cluded in  Accounts  Payable  but  the  amount  was  not  included  in  the  inventory. 

You  are  asked  to  draft  the  necessary  journal  entry  or  entries  to  correct 
these  errors,  and  to  show  the  net  effect  of  the  errors  upon  the  profits  of  each 
of  the  two  years.  Assume  that  the  profits  shown  on  the  ledger  for  1916  were 
$20,000  and  for  1917,  $30,000. 


PROBLEM  20 

(Massachusetts,  1917) 

A  corporation  was  organized  and  began  business  January  1,  1915.  On 
December  31,  1916,  it  closed  its  books  and  presented  a  statement  to  its  bank, 
the  statement  embodying  the  accounts  as  given  below\ 

The  bank  not  being  satisfied  with  the  statement,  instructs  you  to  prepare 
and  certify  a  new  one.  You  find  that  Depreciation  reserves  on  buildings  and 
property  have  never  been  set  up.  In  connection  with  the  machinery,  dies  and 
patterns,  you  find  that  the  business  operates  under  valuable  patents  granted 
January  1.  1915.  and  that  the  machinery,  dies  and  patterns  are  planned  and 
expected  to  last  during  the  life  of  the  patents.  The  patents  used  by  the  cor- 
])oration  will  not  be  subject  to  renewal. 

The  product  is  sold  on  a  20  per  cent,  margin  of  gross  profit.  5  per  cent, 
allowed  to  all  customers  for  cash  discount  and  all  customers'  accounts  are 
collectible.  Salesmen  sell  goods  on  commission  and  are  allowed  to  draw  in 
advance  as  required. 

Preferred-stock  dividends  were  paid  semi-annually  at  the  annual  rate  of 
7  per  cent.  Preferred  stock  was  retired  on  December  30,  1916,  at  115,  the 
January  1.  1917,  dividend,  not  yet  paid,  to  go  to  the  stockholder.  Common 
stock  dividends  have  been  paid  at  the  rate  of  5  per  cent,  each  year  on 
December  1. 

A'  judgment  was  recorded  against  the  corporation  for  $5,000.00  in  Decem- 
ber, and  the  treasurer  states  that  he  does  not  wish  it  to  appear  in  the  state- 
ment for  the  year. 

There  is  a  law  suit  pending  against  the  corporation  for  $20,000,  based 
according  to  the  corporation's  attorney  on  grounds  hard  to  defend. 

19 


TRIAL  BALANCE 

,,    ,  .  Debit               Credit 

Machinery   $  85,000.00 

Land    8,000.00 

Buildings— Brick   38,000.00 

Wooden   28,000.00 

Patents  400,000.00 

Accounts    Payable— Purchase    Ledger $    178,000.00 

Notes   Payable    200,000.00 

Mortgage  Payable   54,000.00 

Finished  Goods   (Selling  Value) 100,000.00 

Prepaid  Insurance   7,850.00 

Cash    55,000.00 

Dies  and  Patterns   34,000.00 

Prepaid  Interest  4,400.00 

Customers'   Ledger   189,500.00 

Personal  Accounts — Salesmen   4,500.00 

Officers    4,000.00 

Goods  in  Process   (Cost) 40,000.00 

Raw  Materials   (Cost) 170,000.00 

Supplies   2,500.00 

Preferred  Stock  Retired 37,950.00 

Personal  Accounts — Officers    2,200.00 

Salesmen    3,000.00 

Preferred  Stock    250,000.00 

Common  Stock  400,000.00 

Accrued  Pay  Roll 4,000.00 

Surplus  117,500.00 

$1,208,700.00     $1,208,700.00 

a.  Prepare  revised  balance  sheet. 

b.  State  the  profits  for  the  past  two  years  after  paying  preferred  stock 
dividends. 

c.  The  expenses  of  selling  and  distributing  the  product  leave  a  margin 
of  net  profit  equivalent  to  ^  of  the  gross  profit. 

What  were  the  total  gross  sales  in  the  two  years? 

PROBLEM  21 
(Illinois,  1907) 

A  corporation's  balance   sheets  for  August,   1907,  and   September.    1907, 
were  respectively  as  follows : 

Assets:  August,  1907 

Plant  and  Equipment $4,000,000.00 

Furniture   6,000.00 

Tools    3,000.00 

Stable    3,81 1.28 

Cash    15,250.36 

Material,   Supplies    30,750.28 

Accounts  Receivable  28,920.13 

Unexpired   Insurance    510.29 

Total   $4,088,242.34 

Liabilities: 

Capital   Stock    $2,500,000.00 

Bonds    1,350,000.00 

Accounts   Payable    31,336.28 

Bills  Payable   26,240.12 

Accrued  Taxes 3,500.00 

Accrued   Interest    5,625.00 

Profit  and   Loss 171,540.94 

Total  $4,088,242.34 

20 


Assets:  September,  190^ 

Plant  and  Equipment $4,012,310.21 

Furniture   6,205.58 

Tools    3,218.86 

Stable    4,009.37 

Cash    8,328.29 

Material,   Supplies    39,280.17 

Accounts    Receivable    32,321.83 

Unexpired   Insurance    832.12 

Total  $4,106,506.43 

Liabilities : 

Capital   Stock    $2,500,000.00 

Bonds   1,362,000.00 

Accounts   Payable    •  . . .  33,445.57 

Bills    Payable    18,240.12 

Accrued  Taxes    4,000.00 

Accrued   Interest    11,250.00 

Profit  and  Loss 177,570.74 

Total  $4,106,506.43 

Analyze  the  differences  in  the  corresponding  accounts  for  the  period  and 
show  disposition  of  increased  resources. 


PROBLEM  22 
(New  York,  June,  1915) 

The  following  is  a  comparative  balance  sheet  at  December  31,  1910,  and 
at  December  31,  1911,  presented  to  the  board  of  directors  of  the  Western 
Company  at  its  meeting  January  5,  1912. 

ASSETS 

December  December 

31,1910  31,1911 

Land   $  20,000.00  $  25,000.00 

Buildings    45,000.00  45,000.00 

Machinery  and  Tools 86.000.00  89,000.00 

Horses,  Wagons  and  Harnesses 10,500.00  10.500.00 

Patents   6,000.00  6,000.00 

Good  Will    25,000.00  25,000.00 

Cash    28,300.00  10,300.00 

Accounts  Receivable  29,600.00  26,550.00 

Investments   and    Bonds 15,000.00 

Inventory— Goods  in  Process 10,800.00  14,690.00 

Inventory— Material  and  Supplies 6,750.00  10,300.00 

Agency  Investments  3,680.00 

$267,950.00  $281,020.00 

LIABILITIES 

Bonds  and  Mortgage   Payable $  20,000.00 

Notes   Payable    $  35,000.00  2,000.00 

Accounts   Payable    ' 16,400.00  19,350.00 

Reserves  for   Depreciation 2,500.00  6,750.00 

Discount  on  Bonds 1,000.00 

Capital  Stock: 

Preferred   150,000.00  150,000.00 

Common    50,000.00  50,000.00 

Surplus  14,050.00  31,920.00 

$267,950.00  $281,020.00 
21 


the  land  increase  was  due  to  appraisal  based  on  rise  of  values  of  factory 
sites  in  the  immediate  vicinity. 

Together  with  the  above  balance  sheet,  there  was  submitted  to  the  board 
a  statement  of  income  and  profit  and  loss  showing  the  profits  of  the  year  to 
have  been  $22,120. 

The  directors  state  to  the  auditor  that  in  view  of  the  decrease  of  cash 
and  accounts  receivable,  of  the  absence  of  dividends,  and  of  the  increase  of 
capital  liabilities,  they  are  unable  to  ascertain  what  has  become  of  the  profits 
of  the  year. 

Prepare  a  statement  to  show  clearly  how  the  Western  Company  has 
applied  such  resources  of  the  year  1910  as  have  been  lost  in  1911  and  the 
resources  and  profits  of  the  year  1911. 


PROBLEM  23 

(Kentucky,  1917) 

On  January  4th,  1917,  the  following  comparative  balance  sheet  was  sub- 
mitted to  the  Board  of  Directors  of  the  Lewis  Jones  Company : 

Assets 

December  December 

31,  1915  31, 1916 

Cash    $  32,500.00  $  12,100.00 

Accounts    Receivable    34,400.00  28,200.00 

Bonds   1,300.00  27,300.00 

Inventory,  Goods,  Process  of  Mfg 12,200.00  16,400.00 

Inventory,  Material  and   Supplies 15,100.00  20,500.00 

Real   Estate    20,000.00  20,000.00 

Buildings    42,000.00  47,000.00 

Machinery  and  Tools 87,000.00  90,000.00 

Automobiles,   Trucks    12,000.00  12,000.00 

Insurance    400.00  600.00 

Patents  5,000.00  5,000.00 

Good  Will    30,000.00  30,000.00 


$291,900.00  $309,100.00 

Liabilities 

Capital  Stock 

Preferred   $  50,000.00  $  50,000.00 

Common 100,000.00  100,000.00 

Accounts   Payable    51,200.00  16,100.00 

Bonds  and  Mortgage   Payable 2,000.00  18,000.00 

Discount  on  Bonds 500.00  1,500.00 

Reserve  for  Depreciation 4,500.00  6,500.00 

Surplus  83,700.00  117,000.00 


$291,900.00    $309,100.00 

Together  with  the  above  balance  sheet  there  was  also  submitted  to  the 
Board  of  Directors  a  statement  of  Profit  and  Loss,  showing  the  profits  of  the 
year  to  have  been  $35,300. 

The  directors  desire  a  statement  showing  what  has  become  of  the  profits 
for  the  year  and  why  they  cannot  declare  a  large  dividend  in  view  of  the  fact 
that  they  have  apparently  earned  $35,300. 

Prepare  a  statement  to  show  clearly  how  the  Lewis  Jones  Company 
applied  the  profits  for  year  ending  December  31,  1916. 

22 


PROBLEM  24 
(Pennsylvania,  1900) 

Which  of  the  following  corporations  is  the  stronger  financially?     Show 
how  and  why. 

RUSTLESS  IRON  COMPANY 
Assets 

Cash   $  381,845.32 

Real  Estate,  Buildings,  etc 1,204,123.98 

Bills    Receivable    84,843.08 

Accounts   Receivable    .    1,154,111.35 

Good  Will,  Trade  Marks,  Patents 5,000,000.00 

Bonds  on  Hand  5,026.67 

Taxes  and  Insurance 5,730.87 

Lost  Creek  Railroad  Stock 8,245.36 

Company  Capital  Stock,  Title 650.00 

Inventor}' — Materials,   Supplies    1,664,113.28 

Machinery,   Tools,   Patterns,   Office  and  Shop   Furniture  and 

Fixtures    2,286,158.30 

Total  Assets  $11,794,848.21 

Liabilities 

Accounts  Payable  $  545,039.55 

Preferred  Stock  5,000,000.00 

Surplus    204,302.88 

Contingency    ; 49,432.34 

Common  Stock   5,000,000.00 

Loss  and  Gain 996,073.44 

Total   Liabilities    $11,794,848.21 

ENDLESS  CHAIN  COMPANY 
Assets 

Cash   $181,845.32 

Bills    Receivable    84,843.08    $  266,688.40 

Accounts   Receivable    954,111.35 

Bonds    (Investment)    15,026.67 

Atlantic  City  R.  R.  Stock 18,245.36 

Other  Company  Stock 11,650.00 

Machinery  and    Patterns 2,255,158.30 

Real   Estate  and  Buildings 1,104,123.98 

Good  Will  and  Patents 5,000,000.00 

Taxes   and    Insurance 15,730.87 

Inventory — Materials,   Supplies    1,774,113.28 

Total    $11,414,848.21 

Liabilities 

Capital  Stock   $10,000,000.00 

Accounts  Payable   1,090,079.10 

Surplus    59,263.46 

Profit   and   Loss 226,073.44 

Contingency    39,432.21 

Total    $11,414,848.21 


PROBLEM  25 
(Wisconsin,  May,  1919) 
On  January  2nd,  1916,  the  X  Manufacturing  Company  took  over  the  busi- 


hess  of  ferown  and  Smith.    The  capitalization  of  the  company  was  $400,000, 
divided  as  follows : 

7%  Cumulative  Preferred  Stock $200,000.00 

Common  Stock  200,000.00 

On  March  1st,  1919,  the  annual  stockholders  meeting  was  held  and  the 
following  financial  statement  was  presented  : 

X  MANUFACTURING  COMPANY 

FINANCIAL  STATEMENT,  DECEMBER  31,  1918 

Assets 

Real   Estate    $    5,000.00 

Buildings   $125,000.00 

Less  Reserve  for  Depreciation 2,500.00  122,500.00 

Equipment    $380,000.00 

Less  Reserve  for  Depreciation 4,800.00  375,200.00 

Inventories: 

Raw   Material    30,000.00 

Goods   in    Process 75,000.00 

Finished  Goods  65,000.00 

Sundry   Factory   Supplies 5,000.00 

Accounts    Receivable    15,000.00 

Notes  Receivable  5,000.00 

Cash    10,000.00 

Prepaid  Expense  Items 5,000.00 

Total  Assets    $712,700.00 

Liabilities 

Notes    Payable    $180,000.00 

Accounts   Payable    50,000.00 

Reserve   for   Taxes 3,000.00 

Accrued  Salaries  and  Wages 2,000.00 

Total  Liabilities   235,000.00 

Proprietary  Interest 

Preferred  Stock    $200,000.00 

Common  Stock  200,000.00 

Surplus 77,000.00 

Total  Proprietary  Interest 477,000.00 

The  stockholders  authorize  the  issuance  of  $300,000  of  5  per  cent,  first 
mortgage  bonds,  the  proceeds  of  which  are  to  be  used  to  pay  the  current  debts 
and  for  necessary  improvements  in  the  buildings  and  equipment. 

The  Company  has  given  the  above  financial  statement  and  the  following 
summary  operating  statements  to  the  A  Bond  Company,  who  may  purchase 
the  entire  issue  at  95.  The  A  Bond  Company,  in  turn,  asks  you  to  verify 
the  statements  and  to  report  upon  the  advisability  of  the  purchase. 

X  MANUFACTURING  COMPANY   SUMMARY   OPERATING 
STATEMENTS 

1916  1917  1918 

Sales    $690,700.00    $720,900.00    $870,200.00 

Cost  of  Production 560,000.00      690,800.00      706.700.00 

Gross  Profits   $130,700.00      $30,100.00    $163,500.00 

Selling  Expenses    25,000.00        28,100.00        31,000.00 


24 


Net  Operating  Profit $105,700.00        $2,000.00    $132,500.00 

Interest  and  other  Financial  Expenses.     25,000.00        22,000.00        27,500.00 

Net  Profit  or  Loss $80,700.00      $20,000.00    $105,000.00 

Dividends  Paid  28,000.00        14,000.00        28,000.00 

Balance  in  Surplus $52,700.00      $18,700.00      $77,000.00 

Outline  the  report  requested  by  the  A  Bond  Company,  state  the  reasons 
for  your  conclusions  according  to  data  available,  and  also  detail  other  points 
which  should  be  investigated  before  a  definite  decision  as  to  the  purchase  is 
made. 


PROBLEM  26 
(North  Carolina,  1919) 

What  is  the  book  value  of  a  share  of  stock  of  a  corporation,  the  balance 
sheet  of  which  is  as  follows?  (Arrange  the  balance  sheet  so  as  to  show  the 
book  value  of  its  net  assets,  and  state  the  book  value  of  a  share  of  its  stock.) 

Assets 

Cash  on  Hand $  35,687.85 

Accounts   Receivable    25,972.42 

Stocks  Owned  at  Cost 72,000.00 

Inventories  at  Cost 49,889.22 

Deferred  Charges  to  P.  &  L 527.19 

Liberty   Bonds    20,000.00 

Value  of  Good  Will  (set  up) 50,000.00 

Notes  Receivable  5,000.00 

Treasury  Stock  30,000.00 

Cost  of  Plant 780,398.32 

$1,069,475.00 

Liabilities 

Capital  Stock  (3,000  shares) $  300,000.00 

Surplus  100,000.00 

Undivided   Profits    165,000.00 

Bonds  Outstanding  200,000.00 

Reserve  for  Depreciation    75,000.00 

Reserve  for  Additions  and  Improvements  to  Plant 50,000.00 

Reserve  for  Shrinkage  of  Inventory  Values 5,000.00 

Reserve  for  Dividends   15,000.00 

Reserve  for  Doubtful  Accounts    2,000.00 

Reserve  for  Extinguishment  of  Bonds 50,000.00 

Reserve  for  Estimated  Federal  Income  Taxes 15,000.00 

Accounts   Payable    31,000.00 

Notes   Payable    60,000.00 

Accruals  1.475.00 

$1,069,475.00 

PROBLEM  27 
(Wisconsin,  November,  1919) 

The  following  balance  sheet  has  been  published  by  the  X  Company  as 
showing  the  condition  of  the  business  after  the  sale  of  $10,000,000.00  of  the 
first  preferred  stock  and  all  of  the  second  preferred  stock  noted  therein.  A 
prospective  purchaser  of  some  of  the  stock  asks  you  to  tell  him  book  values 

25 


of  each  class  of  stock,  amounts  of  net  tangible  and  net  quick  assets  for  the 
appropriate  class  or  classes  of  stock,  and  to  advise  him  whether  to  purchase 
the  first  preferred  at  95  or  the  common  at  90: 

Assets         ' 

Land,  Buildings,  Machinery $  7,000.000.00 

Good  Will  and  Patents 8,000,000.00 

Investments  500,000.00 

Cash  10,715,000.00 

Inventories    13,000,000.00 

Accounts  and  Notes  Receivable 10,000,000.00 

Other  Current  Assets   450,000.00 

Deferred  Charges  335,000.00 

$50,000,000.00 

Liabilities 

Capital  Stock: 

7%  Cumulative  First  Preferred $15,000,000.00 

7%  Cumulative  Second  Preferred 5,000,000.00 

Common  Stock,  75,000  Shares  no  Par  Value 6,000,000.00 

Notes  and  Accounts  Payable 13,000,000.00 

Dividends  Payable    52,500.00 

1919   Federal  Taxes 1,000,000.00 

Reserve   for   Depreciation 3,447,500.00 

Surplus   6,500,000.00 

$50,000,000.00 

The  par  value  of  the  preferred  stock  shares  is  $100.00.  It  is  expected  that 
a  quarterly  dividend  of  $2.00  per  share  will  be  paid  upon  the  common  stock. 

In  your  report  mention  such  matters  as  it  would  seem  advisable  to  know  in 
addition  to  those  contained  in  the  statement  given  above. 


PROBLEM  28 

(Missouri,  1914) 
The  trial  balance  of  the  Interstate  Manufacturing  Company,  on  June  30, 
1912,  after  closing  entries  have  been  made,  is  given  below: 

Patents  and  Good  Will $   250,000.00 

Office  Furniture   8746.00 

Inventory,  June  30,  1912: 

Raw   Material    83.247.00 

Supplies   4,932.00 

Finished   Goods    42,761.00 

Petty  Cash  100.00 

Land  270,000.00 

Buildings    165,000.00 

Machinery   235,000.00 

Cash  Subject  to  Check 69,433.00 

Accounts    Receivable    273,842.00 

Common  Capital  Stock $   500,000.00 

Preferred  Capital  Stock 500,000.00 

Bonds,  6%   50-year   1st  Mortgage,   Issued  June 

30    1912    200,000.00 

Premium   on    Bonds 20,000.00 

Preferred  Stock  Dividends  Payable  August,  1912  17,500.00 

Common  Stock  Dividends  Payable  August,  1912  12,500.00 

Reserve  for  Bad  and  Doubtful  Accounts 8,294.00 

Undivided  Surplus  66,375.00 

Accounts  Payable   78,392.00 

$1,403,061.00     $1,403,061.00 
26 


t)uring  the  year  ending  June  30,  1913,  the  company  purchased  29,047  tons 
of  raw  material  at  $22  per  ton,  which  was  delivered  before  the  books  closed. 
Of  the  amount  purchased,  payment  has  been  made  for  26,647  tons.  They 
have  also  made  payments  for  the  following  accounts : 

Accounts  payable,  $78,392 ;  salaries,  $80,360 ;  selling  expense,  $86,017 ; 
labor,  $468,932 ;  shop  expense,  $9,461 ;  taxes,  $7,842 ;  repairs  and  maintenance, 
$30,955 ;  office  expense,  $2,478,  and  supplies,  %^7,62,7. 

Customers  have  paid  $1,502,927  in  cash,  and  have  been  given  discounts 
amounting  to  $18,395.  Returns  and  allowances  amount  to  $8,474.  Bad  debts 
writteo  off,  $2,407.    Rents  received,  $500,  and  sales,  $1,515,572. 

Fifty  thousand  dollars  was  borrowed  on  call  on  June  30,  1913,  the  market 
value  of  the  collateral  security  being  $72,100.00. 

The  inventory  on  June  30,  1913,  is  "made  up  of  finished  goods,  $20,495; 
supplies,  $8,129,  and  2,163  tons  of  raw  material,  the  market  price  of  which 
is  $24  per  ton.    The  land  is  estimated  to  be  worth  $300,000. 

Semi-annual  dividends  of  3^  per  cent,  on  the  preferred  stock  and  2^  per 
cent  on  the  common  stock  have  been  paid  from  the  earnings  of  the  half  year 
ending  December  31,  1912.  Dividends  at  the  same  rate  have  been  declared 
on  the  preferred  and  common  stock  for  the  last  half  of  the  fiscal  year,  payable 
in  August,  1913. 

You  are  asked  to  set  up  a  balance  sheet  dated  June  30,  1913,  and  accom- 
pany it  with  a  statement  which  Avill  show  correctly  the  operations  of  the 
company. 

The  following  annual  rates  of  depreciation  are  to  be  assumed : 

Buildings,  3  per  cent. :  machinery,  7^  per  cent. ;  office  furniture,  10  per 
cent.  It  is  also  assumed  that  there  should  be  a  reserve  for  bad  and  doubtful 
accounts  equal  to  3  per  cent,  of  the  balance  of  accounts  receivable.  Calculate 
these  percentages  to  the  nearest  dollar. 

PROBLEM  29 
(Iowa,  1917) 
On  January   1,   1908,  the  condition  of  a  small  trading  company   was  as 
follows : 

Assets 

Furniture  and  Fixtures $2,000.00 

Cash    500.00 

Notes  Receivable   3,000.00 

Accounts    Receivable    5,000.00 

Merchandise  on  Hand 4,000.00    $14,500.00 

Capital  Stock  and  Liabilities 

Capital    Stock    $5,000.00 

Notes   Payable    3,000.00 

Accounts   Payable    6,000.00 

Surplus  500.00    $14,500.00 

During  the  month  of  January,  the  bookkeeper  made  all  entries  in  the 
cash  book  and  in  the  sales  book,  but  made  no  journal  entries  and  did  not 
post  his  ledger.  In  addition  to  the  entries  appearing  in  the  cash  book  and 
on  the  sales  book,  the  following  transactions  took  place  during  January : 
Merchandise  purchases  on  credit  amounting  to  $6,000,  notes  payable  amount- 
ing to  $3,000  renewed,  special  allowance  of  $500  made  to  customers. 

The  Credit  Sales  Journal  had  two  columns ;  one  for  the  billed  amounts 

27 


and  the  other  for  the  cost  oi  the  goods  sold.    The  billed  amount  was  $S,000 
and  the  cost  $5,000. 

The  following  statement  gives  a  summary  of  the  Cash  Receipts  and  Dis- 
bursements for  January : 

Cash  Received 

Collected  from  Customers   $4,000.00 

Collected  on  Notes    Receivable    2,000.00 

Collected  on  Merchandise    Sold    and    not    Entered    on 

Sales  Book   (Cost  $500) 600.00    $  6,600.00 

Cash  Payments 

Interest  on  Notes  Payable $     45.00 

Salaries    500.00 

Rent    200.00 

Sundry  Expenses  300.00 

Accounts   Payable    5,000.00    $  6,045.00 


Prepare  Balance  Sheet — January  31,   1908,  and  Statement  of  Profit  and 
Loss,  based  on  the  book  value  of  the  merchandise. 


PROBLEM  30 

(New  York,  January,  1916) 

John  Smith  is  in  business  for  himself.  His  net  assets  are  $18,000,  his  net 
liabilities  $10,000.  At  this  time  he  makes  the  followng  proposal  in  writing, 
to  his  manager,  Frank  Doe : 

"Give  me  $5,000  in  cash,  and  I  will  make  of  you  an  equal  partner,  chang- 
ing the  firm  name  to  John  Smith  &  Co.  I  will  continue  to  draw  a  salary  of 
$60  per  week  and  you  will  get  $50  per  week."  Mr.  Doe  accepted  this  offer, 
by  writing  across  its  face,  in  red  ink :  "This  suits  me.  I  accept."  Mr.  Doe 
a  few  days  later  delivered  to  Mr.  Smith  $1,200  in  cash  and  $3,800  in  checks. 
Show  the  entry  or  entries  in  the  books  of  John  Smith  which  will  continue 
to  be  employed  by  the  partnership. 


PROBLEM  31 

(California,  1908) 

Two  partners,  named  Wilson  and  Peters,  find  at  the  end  of  the  first  year's 
business  the  Balance  Sheet  shows  that  Wilson's  interest  is  worth  $18,000.00 
and  Peters'  $9,000.00. 

The  good  will  of  the  firm  is  worth  $3,000.00.  Each  draws  profits  in  pro- 
portion to  his  investment. 

They  conclude  to  take  in  another  partner,  and  he  is  to  have  a  one-quarter 
interest  in  the  new  firm. 

What  sum  must  the  new  partner  contribute?  How  will  the  partnership 
accounts  appear  after  the  payment  in  of  the  additional  capital? 

How  will  the  profits  be  divided?    Give  skeleton  form  of  accounts. 

28 


PROBLEM  32 

(Illinois,  May,  1914) 

A  and  B,  equal  partners  in  a  manufacturing  business,  admit  their  factory 
superintendent,  C,  as  an  equal  partner  with  them  in  the  profits  without  his 
furnishing  any  capital,  A  and  B  reserving  to  the'mselves  in  case  of  dissolution 
any  good  will  which  may  have  accrued  to  the  business. 

On  December  31,  1912,  a  balance  sheet  was  drafted  and  approved  by  all 
concerned  as  follows : 

Assets 

Real  Estate  and  Plant $  90,000.00 

Merchandise   Inventory   35,000.00 

Accounts  Receivable  25,000.00 

Bills  Receivable    ."...  15,000.00 

Cash  and  Bank  Funds 18,000.00 

$183,000.00 

Liabilities 

Bills  Payable   $  10,000.00 

Accounts  Payable    12,500.00 

A's  Account  $  4,500.00 

B's  Account   4,000.00 

Cs  Account  2,000.00    $  10,500.00 

Capital  Accounts 

A   $75,000.00 

B    75,000.00 

$150,000.00 

$183,000.00 
Later  the  business  was  sold  as  a  "going"  concern  and  the  partnership 
dissolved.    The  purchaser  assumes  all  outside  liabilities  and  pays  the  sum  of 
$225,000  cash,  of  which  the  real  estate  and  plant  is  valued  at  $120,000.    Draft 
the  settlement  accounts  as  between  the  partners. 

PROBLEM  33 

1.  A  and  B  are  partners  with  capitals  of  $20,000  and  $11,000,  respectively. 
It  is  agreed  that  a  third  party,  C,  shall  buy  a  one-third  interest  in  the  partner- 
ship, equally  from  A  and  B  upon  the  following  conditions :  The  fixed  assets 
are  to  be  valued  at  $4,000 — less  than  the  figure  at  which  they  appear  in  the 
balance  sheet;  good  will  is  valued  at  $6,000.  Give  journal  entries  necessary 
to  give  effect  to  the  above  agreement. 

2.  A  and  B  are  partners  with  investments  of  $7,500  and  $5,000,  respect- 
ively. They  agree  to  take  in  C  as  a  partner  upon  the  following  conditions : 
Good  will  is  valued  as  two  years'  purchase  of  the  average  of  the  last  three 
years'  net  profits  which  were  $2,000,  $2,500  and  $2,700,  respectively.  C  is  to 
pay  in  cash  to  the  credit  of  the  firm  cash  sufficient  to  make  him  one-quarter 
interest  in  the  new  firm.    Give  the  journal  entries. 

3.  A  and  B  are  in  partnership  with  investments  of  $6,000  and  $4,000, 
respectively.  They  agree  to  take  in  C  as  an  equal  partner  in  the  business 
on  the  following  terms :  The  good  will  is  to  be  valued  at  two  years  of  pur- 
chase of  the  average  of  the  last  three  years'  profits,  which  were  $1,600,  $2,000 
and  $1,800,  respectively.  C  is  to  purchase  his  interest  equally  from  A  and  B 
and  is  to  pay  $5,000  for  it.     Give  the  journal  entries. 

29 


PROBLEM  34 

1.  A  and  B  are  in  partnership,  having  investments  of  $12,000  and  $8,000, 
respectively,  and  sharing  profits  and  losses  in  the  proportion  of  75  per  cent, 
and  25  per  cent.,  respectively.  Interest  at  5  per  cent,  per  annum  is  allowed 
on  investments.  Give  the  journal  entry  which  adjusts  interest  between 
partners  without  use  of  Interest  or  Profit  and  Loss  accounts. 

2.  X  and  Y  entered  into  a  partnership  agreement  whereby  each  was  to 
receive  interest  at  5  per  cent,  on  the  excess  over  or  pay  interest  on  the  deficit 
under  the  agreed  investment  as  indicated  below.  Draft  journal  entry  to 
adjust  the  interest  between  the  partners  without  using  the  Interest  or  Profit 
and  Loss  accounts.  Profit  and  loss  is  to  be  shared  in  proportion  to  agreed 
contributions,  , 

X  Y 

Agreed  Investment   $4,000.00     $2,000.00 

Actual  Investment   6,000.00       1,000.00 

3.  A  and  B  are  in  partnership,  A's  investment  being  $15,000  and  B's  is 
$12,000.  A  agreed  to  invest  $11,000  and  B  $18,000.  Interest  is  to  be  allowed 
on  excess  over  and  charged  on  deficit  under  agreed  contributions.  Make  a 
journal  entry  to  adjust  interest  between  partners  without  running  it  through 
the  Interest  and  Profit  and  Loss  accounts.  Profits  are  to  be  shared  according 
to  agreed  contributions. 

4.  A,  B  and  C  are  in  partnership  sharing  profits  in  the  proportions  of  ^, 
ys  and  y^,  respectively.  Their  respective  investments  are  $20,000,  $18,000  and 
$15,000.  Interest  at  6  per  cent,  is  allow^ed  on  capital.  Give  the  journal  entry 
that  will  adjust  interest  without  use  of  an  interest  or  Profit  and  Ivoss  account. 


PROBLEM  35 

(Adapted  from  English  Intermediate  Examinations,  November,  1908) 

I.  There  are  three  partners  in  a  trading  concern — X,  Y  and  Z — with  equal 
amounts  of  capital  in  the  business,  on  which  they  draw  interest  at  5  per  cent. 
The  net  profits  of  the  business,  before  charging  interest  on  capital,  amoimt 
to  20  per  cent,  on  such  capital.  The  net  profits,  after  charging  interest  on 
capital,  are  divided  as  follows:  X,  one-half;  Y,  one-third;  Z,  one-sixth.  Tak- 
ing the  interest  and  the  net  profits  together,  prepare  accounts  showing  the 
respective  proportion  of  the  profit  to  be  credited  to  each  partner. 

II.  A  firm  of  three  partners,  G,  H  and  J,  who  were  interested  in  the  profits 
or  losses  of  their  general  business  in  the  proportions  of  40  per  cent.,  30  per 
cent,  and  30  per  cent.,  respectively,  entered,  at  the  instance  of  H,  into  two 
outside  ventures  on  the  understanding  that  if  a  profit  resulted  in  either  case, 
H's  proportion  thereof  should  exceed  his  usual  proportion  by  10  per  cent.,  and 
if,  on  the  other  hand,  a  loss  resulted  from  either  transaction,  H's  proportion 
thereof  should  exceed  his  usual  proportion  by  15  per  cent. 

Venture  No.  1  yielded  a  profit  of  $5,000.00. 

Venture  No.  2  resulted  in  a  loss  of  $2,500.00. 

The  ordinary  business  showed  a  profit  of  $10,000.00. 

Divide  up  the  results  in  the  manner  agreed,  and  show  their  efifect  in  a 
personal  account  with  each  partner. 

30 


PROBLEM  36 
(Adapted  from  English  Final  Examination,  May,  1907) 

A  and  B  are  partners,  sharing  profits  equally.  They  agree  to  dissolve 
partnership  on  December  31st,  1906.  A  to  retire  from  the  concern  and  to  have, 
in  addition  to  his  capital  and  profits,  one-half  of  the  good  will  agreed  as  one 
year's  purchase  upon  an  average  of  the  past  three  years'  net  profits,  the  two 
preceding  years'  net  profits  being  $55,000  and  $52,500,  respectively. 

The  following  is  the  Trial  Balance  of  their  books  on  the  above  date : 

Stock,  1st  January $  41,500.00 

Goods  Purchased   245,000.00 

Goods  Sold  $313,000.00 

Discount  on  Sales 7,500.00 

Salaries  and   Wages 9,000.00 

Incidental  Expenses   ....  1,500.00 

Stationery  and  Postage 500.00 

Bank  Discount    100.00 

Fire   Insurance    100.00 

Bills  Receivable    14,700.00 

Bills  Payable   8,500.00 

Creditors    13.750.00 

Debtors    41,250.00 

Bank    8,925.00 

Cash  in  Hand 75.00 

Bad  Debts 1,100.00 

A's  Capital,  1st  January 32,500.00 

B's  Capital,  1st  January 19,500.00 

A's   Drawings    9,000.00 

B's   Drawings    7,000.00 

$387,250.00    $387,250.00 

The  Stock  at  31st  of  December  was  $37,500. 

Allow  $1,000  as  discount  oflP  debtors  and  $500  discount  off  creditors,  charg- 
ing interest  at  5  per  cent,  upon  capital  and  drawings,  the  latter  being  by  equal 
installments  at  the  end  of  each  quarter,  and  prepare  Profit  and  Loss  account, 
partners'  Capital  accoimts,  and  balance  sheet. 

PROBLEM  37 

(Adapted  from  English  Final  Examination,  December,  1900) 

Crank  and  Crane  carried  on  business  in  partnership,  and  divided  profits 
and  losses  in  proportion  to  their  capital,  three-fifths  and  two-fifths. 

On  January  1st,  1900,  Crank's  capital  was  $52,500  and  Crane's  $35,000.  as 
shown  by  a  balance  sheet  of  that  date.  They  agreed  to  admit  Clark  as  a 
partner  from  the  same  date  on  the  following  terms : 

1.  The  assets,  liabilities  and  capital  to  be  taken  as  shown  in  the  balance 
sheet. 

2.  $12,500  to  be  added  to  the  assets  for  good  will. 

3.  The  amount  of  good  will  to  be  added  to  Crank's  and  Crane's  capital 
in  the  proportion  in  which  they  divide  profits. 

4.  Clark  to  pay  in  cash  to  the  credit  of  the  partnership  such  a  sum  as 
would  give  him  a  one-fifth  share  in  the  business. 

State  what  amount  of  capital  Clark  has  to  bring  in ;  set  up  the  Capital 
accounts  of  each  partner  in  the  new  partnership,  and  state  in  what  propor- 
tions the  profits  will  be  divided  in  the  future ;  Crank  and  Crane,  as  between 
themselves,  sharing  in  the  same  proportions  as  before. 

ai 


PROBLEM  38 
(Adapted  from  English  Final  Examinations,  May,  1907) 

A  and  B  are  equal  partners,  and  their  balance  sheet  at  a  certain  date 
is  as  follows: 

Machinery  and  Plant $  6,250.00  Creditors  $10,000.00 

Horses  and  Wagons     1,250.00  A's  Capital  15,000.00 

Furniture  and  Fixtures 750.00  B's  Capital  15,000.00 

Stock    18,250.00 

Debtors    11,500.00 

Bank  1,500.00 

C'/sh  500.00 


$40,000.00  $40,000.00 

They  decide  to  admit  C  and  D,  the  former  to  provide  $15,000  as  his 
capital,  and  the  latter,  in  consideration  of  his  having  a  personal  business 
connection,  only  to  bring  in  $10,000,  but  his  Capital  account  to  be  credited 
with  the  same  amount  as  C's. 

C  and  D  only  accept  A  and  B's  balance  sheet  subject  to  the  following 
alterations,  which  are  agreed  to : 

Machinery  and  Plant  to  be  taken  at $  5,500.00 

Horses  and  Wagons 1,000.00 

Stock 16,500.00 

Debtors  to  be  subject  to  a  5  per  cent  discount. 

Creditors  to  be  subject  to  a  3  per  cent  discount. 

Adjust  the  accounts  and  prepare  commencing  balance  sheet  of  the  new 
firm. 


PROBLEM  39 
(IlHnois,  May,  1914) 

A  and  B  enter  into  a  partnership  and  will  share  .profits  in  the  proportions 
indicated  by  their  investments.  A  furnishes  $25,000,  and  B  furnishes  $15,000, 
which  is  invested  in  lands  and  buildings,  $10,000 ;  merchandise,  $30,000.  How- 
ever, before  they  have  actually  commenced  business,  C  realizing  that  A  and  B 
have  a  promising  venture,  offers  to  buy  one-third  interest  in  the  business  for 
$20,000.  A  agrees  to  sell,  provided  B  will  consent  to  pay  him  a  bonus  of  $4,000 
out  of  his  (B's)  share.  This  B  agrees  to  do,  and  consents  to  the  sale.  How 
should  the  $20,000  be  divided  between  A  and  B,  so  that  the  interest  of  all 
three  partners  will  be  equal? 

PROBLEM  40 
(Washington,  1917) 

Black  and  White  were  partners  upon  the  following  terms : 

1.  They  were  to  receive  5  per  cent,  interest  upon  their  respective  partner- 
ship capital. 

2.  They  were  to  receive  as  partnership  salaries  as  follows :  Black, 
$250.00  per  month ;  White,  $100.00  per  month,  and  were  to  draw  no  further 
sums  pending  the  ascertainment  of  profits. 

3.  Depreciation  at  10  per  cent,  per  annum  to  be  written  off  Plant  and 
Machinery  as  standing  on  the  books  at  the  close  of  the  year. 

32 


4.  Provision  at  5  per  cent  (for  doubtful  accounts)  to  be  reserved  for  all 
accounts,  receivable,  not  including,  however,  bills  receivable. 

5.  The  net  profit  or  loss  to  be  shared  as  follows:     Black,  two-thirds; 
White,  one-third. 

On  November  30,  1915,  the  following  was  the  trial  balance  of  the  firm's 
books,  which  were  kept  by  double  entry : 

Dr.  Cr. 

Partner's  Salary  Account $     3,850.00 

Purchases    127,310.00 

Investments    (at   cost) 6,150.00 

Wages 19,205.00 

John  Jones  &  Co 17,130.00 

Jas.  Smith   &  Son 35,695.00 

Wm.    Owen    18,120.00 

Legal   Expenses    70.00 

Cash    110.00 

Bank    6,025.00 

Real   Estate    103,205.00 

Machinery  and  Plant 27,200.00 

Bills   Receivable    2,510.00 

Manager's  and  Clerks'  Salaries   4,725.00 

Office  Expense   540.00 

Discount    1,070.00 

Inventory,  January  1,  1915 19,210.00 

Rent   (11  months) 3,300.00 

Albert  Black  (Capital  Account  on  Jan.  1,  1915) $  21,000.00 

Benjamin  White  (Capital  Account  on  Jan.  1,  1915) . .  7,500.00 

Dividends  Received  on  Investments 150.00 

Bills  Payable  19,075.00 

Sales   242,805.00 

Roberts  Brothers   41,215.00 

Robinson   &   Co 28,840.00 

J.  Green  &  Son 34,840.00 


$395,425.00    $395,425.00 

Amend  the  foregoing  balances  so  far  as  may  be  necessary  by  posting 
the  following  transactions  for  the  month  of  December.  1915  : 

Dec.    2.     Purchased  from  Roberts  Bros,  (on  credit) $39,205.00 

"      8.     Paid  Taxes    705.00 

"      9.     Paid  Robinson  &  Co.  (after  deducting  discount  of  $60.00) 1,200.00 

"     10.     Paid  Bill  Payable  to  H.  Brown  &  Co 500.00 

"     11.     Received  from  J.  Smith  &  Co.  (less  discount  of  $210.00) 4,740.00 

"     12.     Sold  Wm.  Owen  (on  credit) 5,000.00 

"     15.     Purchased  from  J.  Green  &  Son  (on  credit) 17,105.00 

"     16.     Bought  Gas  Engine  from  Al-Ki  Gas  Engine  Co.  (on  credit) 1,750.00 

"     17.     Paid  Wages  2,210.00 

"     21.     Paid  Taxes    105.00 

"     24.     Paid  Premium  on  fire  Insurance  Policy  for  Year  Ending  December 

24.  1916 525.00 

"     30.     Received  for  Sale  of  Investments 6,000.00 

"     31.     Paid  Office  Salaries   1,800.00 

Paid  Office   Expenses    100.00 

Paid  Wages  2,200.00 

Sold  James  Smith  &  Co.  (on  credit) 5,245.00 

All  of  the  above  payments  were  made  by  check  and  all  amounts  received 
were  paid  into  the  bank  upon  receipt.  The  stock  on  hand  on  December  31, 
1915.  was  agreed  by  the  partners  as  worth  $17,000.00.  The  outstanding  rent 
due  to  Benjamin  &  Lewis  for  December.  $3(X).00.  and  the  partners  drawings 
for  the  same  month  must  be  provided  for.  After  making  all  adjustments 
provided  for  in  the  clauses  of  the  partnership  agreement,  balance  the  books 
as  at  December  31,  1915.  and  prepare  trial  balance.     Make  up  a  profit  and 

33 


loss  account  divided  into  the  proper  trading  and  general  sections.  Close  this 
by  dividing  the  net  profits  between  the  partners  in  the  proper  proportions  and 
prepare  a  balance  sheet. 

PROBLEM  41 
(English  Intermediate  Examination,  May,  1911) 

Brown  and  Smith  are  partners.    The  partnership  deed  provides  inter  alia: 

1.  That  the  accounts  be  balanced  on  31st  of  December  in  each  year. 

2.  That  the  profits  be  divided  as  follows:     Brown,  one-half;  Smith,  one- 
third,  and  carried  to  a  Reserve  Account  one-sixth. 

3.  That  in  event  of  the  death  of  a  partner,  his  executors   be  entitled 
to  be  paid  out: 

a.  The  capital  to  his  credit  at  date  of  death. 

b.  His  proportion  of  reserve  at  date  of  last  Balance  Sheet. 

c.  His  proportion  of  profits  to  date  of  death  based  on  the  average  profits 
of  the  last  three  completed  j^ears. 

d.  By  way  of  good  will  his  proportion  of  the  total  profits  for  the  three 
preceding  years. 

On  the  31st  of  December,  1909,  the  Ledger  Balances  were: 

Brown's  Capital    $  9,000.00 

Smith's  Capital    6,000.00 

Reserve    ,3,000.00 

Creditors    3,000.00 

Bills  Receivable    $  2,000.00 

Investments    5,000.00 

Cash    14,000.00 

$21,000.00      $21,000.00 

The  profits  for  the  three  years  were: 

1907  $4,200.00 

1908  3,900.00 

1909  4,500.00 

Smith  dies  1st  May.   1910.     Show  the  account  as  between  the  firm  and 
Smith's  executors  on  May  1st,  1910. 


PROBLEM  42 
(Adapted  from   English  Intermediate   Examination,   May,    1908) 

Aird  and  Batty  have  each  carried  on  a  prosperous  business,  which  they 
decide  to  combine  and  convert  into  a  Corporation,  transferring  the  assets  at 
book  values,  and  adding  for  good  will  a  sum  equal  to  four  years'  purchase  of 
the  combined  net  profits  of  the  two  concerns  based  on  the  average  of  the 
preceding  years. 

The  sum  so  ascertained  for  good  will  is  to  be  divided  as  follows:  Aird, 
two-thirds,  and  Batty,  one-third. 

The  three  years'  profits  were:    Aird  $48,315  and  Batty  $39,950. 

The  assets  taken  over  by  the  Company,  viz.  Land.  Buildings,  Plant. 
Machinerv,  Patterns.  Stock,  and  Debtors,  amount  to:  Aird  $157,280  and 
Batty  $59,040. 

The  purchase  money  is  payable  as  follows :  Fully-paid  preferred  stock 
and  cash,  in  equal  proportions,  to  represent  the  above  assets. 

34 


Fully-paid  common  stock  to  represent  the  value  of  good  will. 
Show  the  amounts  receivable  by  each  of  the  vendors  in  preferred  stock, 
in  common  stock,  and  in  cash. 

PROBLEM  43 
(Wisconsin,  1916) 

A,  B  and  C  are  in  partnership.  A  invested  $11,000;  B  invested  $5,000; 
and  C  invested  $1,200.  Their  agreement  provides  that  profits  or  losses  shall 
be  divided  as  follows : 

A,  4/9;  B,  3/9;  C,  2/9. 

The  partnership  has  become  insolvent  and  has  therefore  decided  to  dis- 
solve. The  cash  value  of  assets  is  $10,000.  The  deficit  is,  therefore,  $7,200. 
How  should  the  assets  be  divided  and  how  much  money  will  each  partner 
receive? 

PROBLEM  44 

(Illinois,  May,  1910) 

A,  B  and  C  engage  in  business,  A  contributing  $10,000  capital;  B.  $5,000, 
and  C  undertakes  to  take  the  active  management  at  a  salary  of  $3,000  a  year, 
to  be  paid  to  him  monthly.  After  providing  5  per  cent,  interest  on  capital 
they  are  to  divide  the  net  results  in  the  proportions  of  5,  3  and  2.  At  the 
end  of  18  months  they  ascertain  the  position  to  be  unfavorable  and  decide 
to  wind  up.  The  assets  are  agreed  to  be  worth  $12,500,  of  which  A  takes 
$10,000  and  B  $2,500.  There  are  no  liabilities  except  for  the  capital  and 
simple  interest  thereon,  and  one  month's  salary  due  C.  State  the  position 
of  the  three  partners  to  each  other. 

PROBLEM  45 
(Illinois,  November,  1908) 

A,  B  and  C  were  partners  and  contributed  the  following  capital :  A 
$8,000,  B  $6,000  and  C  $4,000.  Profits  and  losses  were  to  be  Ijorne  equally, 
At  the  end  of  the  first  year  each  partner  had  drawn  $1,000.  The  assets  were 
then  disposed  of  for  $3,000,  the  purchaser  discharging  all  liabilities  of  the 
firm.  How  should  this  sum  of  $3,000  be  apportioned  among  the  partners  and 
would  any  of  them  have  to  advance  any  further  sum?  If  so,  state  which 
partner  and  how  much  and  make  up  the  necessary  accounts  to  show  the 
results. 


PROBLEM  46 
(Wisconsin,  November,  1919) 

A.  B  and  C  were  partners  in  a  business  on  the  following  basis: 

Capital  Contributed         Share  of  Profits         Salaries 

A $45,000.00  50%  $6,000.00 

B 22,500.00  40%  4,000.00 

C  7,500.00  10%  2,400.00 

At  the  end  of  the  second  year's  business  A  died.     The  partners'  drawing 

35 


accounts  before  crediting  their  vear's  salaries  appeared  with  the  following 
debit  balances:    A,  $2,572.00;  B,' $1,218.00;  C,  $1,710.00. 

The  net  assets  of  the  business,  after  finally  closing  the  books,  were  found 
to  be  $74,780.00.  B  and  C  liquidate  the  aflfairs  of  the  partnership.  Three 
distributions  of  the  proceeds  of  liquidation  were  made  as  follows :  $25,000.00, 
$35,000.00,  $11,780.00. 

You  are  asked  to  prepare  a  tabulation  showing  the  share  of  each  of  the 
distributions  to  each  of  the  partners. 

PROBLEM  47 
(New  York,  January,  1915) 

On  June  30,  1913,  X  and  Y,  partners,  operating  a  manufacturing  plant, 
incorporated  under  the  laws  of  the  state  of  New  York  as  the  X  and  Y  Manu- 
facturing Company  with  an  authorized  capital  of  $500,000.  The  corporation 
purchased  all  of  the  assets  and  assumed  all  of  the  liabilities  of  the  partnership 
as  set  forth  in  a  balance  sheet  dated  June  30,  1913,  giving  as  consideration  its 
entire  issue  of  capital  stock,  which  stock  was  all  taken  by  X  and  Y. 

BALANCE  SHEET,  JUNE  30,  1913 
Assets 

Plant  and  Machinery $175,000.00 

Material  on  Hand,  per  Inventory 102,625.00 

Accounts    Receivable    » 113,750.00 

Notes  Receivable   7,500.00 

Cash 32,125.00 

Total  $431,000.00 

Liabilities 

X,  Capital  $240,000.00 

Y,  Capital   160,000.00 

Accounts   Payable    26,250.00 

Notes    Payable    3,500.00 

Wages  Due  and  Unpaid 1,250.00 

Total $431,000.00 

The  change  in  organization  was  not  reflected  on  the  books  at  the  time 
of  incorporation,  but  at  the  close  of  the  first  fiscal  year  (June  30,  1914)  of 
the  corporation's  existence  the  condition  of  the  books  was  shown  by  the 
following  trial  balance: 

TRIAL  BALANCE,  JUNE  30,  1914 

X,  Capital   $   240,000.00 

Y,  Capital   160,000.00 

Plant  and   Machinery $    187,500.00 

Material,  per  Inventory  June  30,  1913 102,625.00 

Sales    657,025.00 

Purchases    240,000.00 

Labor    172,500.00 

Office  Salaries  35,000.00 

Traveling   Expenses    12,000.00 

Interest    3,000.00 

Stationery    and    Printing 875.00 

Rent  and  Taxes 21,000.00 

Discount  and  Allowances 11,250.00 

Fuel  23,000.00 

Insurance    875.00 

Freight,  inward  8,750.00 

36 


Commission    31,875.00 

Advertising   2,500.00 

Notes  Receivable   30,575.00 

Notes   Payable    5,500.00 

Accounts    Receivable    180,575.00 

Accounts   Payable    39,250.00 

Cash    37,875.00 


$1,101,775.00     $1,101,775.00 

Depreciation  on  plant  and  machinery,  5  per  cent. ;  unexpired  insurance, 
$375;  bad  debts,  $1,625;  inventory  of  material  on  hand  June  30,  1914,  $98,025. 

Make  such  entries  as  would  convert  the  partnership  books  into  those  of 
the  corporation,  and  prepare  a  statement  of  income  and  profit  and  loss  for 
the  year  July  1,  1913,  to  June  30,  1914,  and  a  balance  sheet  as  of  June  30.  1914. 


PROBLEM  48 
(Ohio,  November,  1913) 

The  Unique  Manufacturing  Company,  a  corporation,  was  organized  July 
1,  1913,  with  an  authorized  capital  stock  of  $215,000,  par  value  of  shares,  $100 
each,  for  the  purpose  of  manufacturing  novelties.  The  five  incorporators 
eubscribed  and  paid  for  five  shares  each,  organization  expenses  were  incurred 
to  the  amount  of  $5,000  and  paid  for  in  stock,  and  the  balance  of  the  stock 
was  disposed  of  on  the  following  conditions :  Ten  per  cent,  upon  subscription, 
and  three  equal  calls  for  the  balance  at  30,  60  and  90  days. 

On  July  31st  The  Unique  Manufacturing  Company  secured  an  option 
for  thirty  days  on  the  plant  of  A  and  B.  for  $10,000.  agreeing  to  take  over  the 
assets  exclusive  of  cash,  and  assume  the  liabilities  of  the  partnership,  as  at 
July  31st,  for  the  sum  of  $200,000,  payable  $90,000  immediately  after  taking 
over  the  business,  and  the  balance  in  90  days.  At  the  expiration  of  the  option, 
the  corporation  took  over  the  plant  as  agreed. 

The  following  is  a  transcript  of  A  and  B's  ledger  balances  as  at  July  31, 
1913: 

Land    $30,000.00 

Buildings 35,000.00 

Machinery   20,000.00 

Furniture   and   Fixtures 5,000.00 

Raw   Material    10,000.00 

Tools  ; 2,500.00 

Finished    Goods    10,000.00 

Work  in  Process 5,000.00 

Supplies  7,500.00 

Accounts    Receivable    25,000.00 

Cash    8,200.00 

Mortgage  on  Buildings 10,000.00 

Reserve  for  Depreciation — Machinery 2,500.00 

Reserve  for  Bad  Debts   1,000.00 

Accounts   Payable    15,000.00 

"A"    77,820.00 

"B"    51,880.00 

During  the  interval  A  and  B,  with  the  consent  of  the  corporation,  had  sold 
finished  goods  for  $5,000,  which  was  25  per  cent,  above  cost. 

The  subscriptions  to  the  stock  of  the  corporation  were  met  on  call  with 
the  exception  that  on  the  second  call  a  subscriber  for  twenty-five  shares  noti- 
fied the  corporation  that  he  was  unable  to  complete  his  agreement,  and  he 

37 


was  released  without  further  liability.    The  forfeited  stock  was  sold  for  cash, 
at  par. 

From  the  foregoing,  draft : 

a.  Journal  entries  necessary  to  close  the  books  of  the  partnership. 

b.  To  open  the  books  of  the  corporation  and  to  show  all  transactions 
on  The  Unique  Company's  books. 

c.  Balance  Sheet  of  The  Unique   Manufacturing  Company,   September 
1,  1913. 


PROBLEM  49 
(Washington,  1908) 

A  and  B  were  partners  trading  under  the  name  of  A,  B  &  Co.  June  30, 
1908,  the  following  balances  appear  on  their  ledger : 

A,  Capital  Account $70,000.00 

B,  Capital  Account 50,000.00 

Real  Estate  22,000.00 

Buildings   20,000.00 

Machinery  and  Tools 44,000.00 

Furniture  and   Fixtures 2,000.00 

Accounts  Receivable  50,000.00 

Cash    7,000.00 

Materials  and   Merchandise 53,000.00 

Accounts   Payable    35,000.00 

Bills  Payable   48,000.00 

Bills   Receivable    5,000.00 

On  June  30,  1908,  the  business  is  incorporated  as  the  X  Company,  on  the 
following  plan : 

1.  Capital  Stock,  $150,000.00. 

2.  X  Co.  takes  over  entire  assets  and  liabilities  of  A,  B  &  Co.  at  the  book 
figures  as  above,  except  (a)  real  estate  of  the  book  value  of  $5,000,  which  is 
retained  by  A,  B  &  Co. ;  (b)  the  accounts  receivable,  which  are  taken  over  at 
$48,000,  and  (c)  the  capital  accounts  of  the  partners.  v 

3.  X  Co.  pay  A,  B  &  Co.  $30,000  for  the  good  will  of  the  business. 

4.  Payments  to  A,  B  &  Co.  are  made  as  follows,  viz.,  $50,000  in  first 
mortgage  bonds,  and  the  balance  in  capital  stock  of  the  X  Company. 

5.  After  paying  off  A,  B  &  Co.  the  remainder  of  the  capital  stock  is  sold 
for  cash  to  sundry  persons. 

The  real  estate  which  is  retained  by  A,  B  &  Co.  is  bought  from  A,  B  & 
Co,  by  A  for  $7,000  and  is  charged  to  A's  capital  account. 

After  the  conclusion  of  the  foregoing  described  transactions  A  and  B 
dissolve  partnership. 

You  are  required: 

a.  To  prepare  closing  entries  for  the  books  of  A,  B  &  Co. 

b.  A  statement  setting  forth  the  partners'  accounts  down  to  their  final 
closing,  beginning  with  the  balances  shown  by  the  books  on  June  30,  1908. 

c.  Opening  entries  for  the  X  Company. 

PROBLEM  50 
(Iowa,  1918) 

A  corporation,  incorporated  under  the  laws  of  the  State  of  South  Dakota 
with  an  authorized  capitalization  of  $1,000,000.00,  offers  stock  for  subscrip- 

38 


tion  under  the  following  terms  and  conditions : 

The  sale  of  shares  of  preferred  stock,  par  value  $100.00,  at  a  discount  o^ 
25  per  cent.,  payable  in  five  installments.  To  each  purchaser  of  preferred 
stock  shall  be  donated  one  share  of  common  stock,  par  value  $100.00. 

At  the  end  of  the  year  it  was  found  that  money  had  been  received  from 
installments  paid  on  subscriptions  to  preferred  stock  as  follows: 

First   Installments    $120,750.00 

Second  Installments    96,600.00 

Third   Installments    96.600.00 

Fourth   Installments    96,600.00 

Fifth   Installments    96,600.00 

The  organizer  of  the  corporation  had  purchased  a  vacant  building  and 
real  estate  suitable  for  the  factory  site,  paying  therefor  $27,500.00.  The  prop- 
erty purchased  was  appraised  bv  disinterested  appraisers  and  valued  con- 
servatively at  $45,000.00. 

The  owner  (organizer)  then  turned  the  said  property  over  to  the  corpora- 
tion at  the  appraised  value,  viz.,  $45,000.00,  and  received  therefor  preferred 
stock  at  same  price  as  subscribers,  which  was  at  25  per  cent,  discount,  and 
also  received  one  share  of  common  stock  (donated)  for  each  share  of  pre- 
ferred stock. 

The  expenses  of  organization  and  sale  of  stock  at  the  end  of  the  year  was 
found  to  be  as  follows  : 

Commissions   on   Sale   of  Stock $10,000.00 

Office   Expenses,    Clerk   Hire,    Heat   and    Light,    Stationery   and 

other  Expenses   3,000.00 

Appraisal   250.00 

Betterments  and  Remodeling  Building  for  Occupancy 2,000.00 

Draw  up  statement  showing  the  condition  of  organization,  using  receipts 
and  disbursements  as  above  and  showing  the  condition  of  stock  subscriptions 
and  stock  issue. 


PROBLEM  51 
(Wisconsin,  1917) 

Assume  that  the  Wisconsin  Motor  Company  was  incorporated  in  New 
York  on  January  2,  1917,  to  acquire  the  business  of  the  Wisconsin  Automo- 
bile Corporation.  The  authorized  capital  stock  of  the  Wisconsin  Motor  Com- 
pany is  $2,000,000  7  per  cent,  cumulative  preferred  and  600.000  shares  of  com- 
mon stock  of  no  specified  par  value. 

The  balance  sheets  of  the  Wisconsin  Automobile  Corporation  on  January 
1,  1917,  and  January  1,  1916,  were  as  follows: 

Assets 

1917  1916      • 

Cash  on  Hand  and  on  Deposit $     564,747.00  $1,173,135.00 

Notes   and  Accounts   Receivable 2,873.383.00  1,049,005.00 

Investments    530,702.00  401.127.00 

Merchandise    Inventories    5,860,948.00  3,327,301.00 

Real  Estate,  Buildings,  Machinery 3,184,278.00  2,215,831.00 

Good  Will    1.00  1.00 

Prepaid   Expenses    37,480.00  27,863.00 

$13,051,539.00     $8,194,263.00 
39 


Liabilities 

1917  1916 

Notes   Payable    $3,000,000.00  $   250,000.00 

Accounts   Payable    1,040,799.00  437,283.00 

Dealers'   Contract   Deposits 105,662.00  90,326.00 

Accrued  Accounts   243,821.00  73,969.00 

$4,390,282.00        $851,578.00 

Proprietary  Interest 

1917  1916 

Preferred  Stock   $1,400,000.00  $1,100,000.00 

Common    Stock    5,000,000.00  5,000,000.00 

Contingent   Reserve    136,783.00  145,764.00 

Surplus  2,124,474.00  1,096,921.00 

$8,661,257.00     $7,342,685.00 

The  preferred  stock  of  the  old  corporation  was  exchanged  for  the  full 
amount  of  the  preferred  stock  in  the  new  company.     Of  the  new  company's 
common  stock  200,000  shares  were  exchanged  for  the  common  stock  of  the 
old  corporation,  200,000  shares  were  unissued  at  the  present  and  the  remaining 
200,000  shares  were  offered  for  pubHc  subscription  at  $35  per  share.     The 
transactions  in  this  portion  of  the  stock  are  as  follows : 
50,000   Shares   Sold  at   $32.00    Per    Share 
100,000   Shares    Sold   at  $36.00    Per    Share 
50,000   Shares   Sold   at   $34.00    Per    Share 
The  new  company  expects  to  maintain  a  dividend  policy  on  common  stock 
at  $3  per  share  per  annum. 
You  are  asked  to  prepare  : 

(a)  The  opening  balance  sheet  of  the  Wisconsin  Motor  Company,  as  of 

January  2,  1917,  assuming  that  the  common  shares  were  sold 
for  cash  on  that  day. 

(b)  What  is  the  book  value  of  a  share  of  common  stock  in  the  new 

company  ? 

(c)  How  would  you  account  for  the  sale  of  stock  at  $32-$36  per  share? 

(d)  Prepare  a  comparative  statement  of  assets,  liabilities  and  proprie- 

tary interest  of  the  Wisconsin  Motor  Corporation  by  showing 
increases  or  decreases  for  each  of  the  items  listed. 

(e)  What  is  the  probable  cause  of  forming  the  new  company?    Of  in- 

corporating under  the  law  which  allows  capital  stock  of  no  par 
value  to  be  issued? 


PROBLEM  52 
(Wisconsin,  November,  1919) 

On  January  1,  1919,  the  close  of  its  third  year's  business,  the  following  ac- 
counts were,  open  upon  the  General  Ledger  of  the  Winner  Manufacturing 
Company : 

Preferred   Capital   Stock $376,000.00 

Common  Capital  Stock 600.000.00 

Cash  on   Deposit $50,000.00 

Imprest  Cash  Fund 500.00 

Real   Estate    250,000.00 

Buildings    300,000.00 

Notes  Receivable    8,000.00 

Factory  Equipment  450,000.00 

Accounts   Payable    53,000.00 

40 


Notes   Payable •  • 25,000.00 

Reserve  for  Depreciation,  Buildings   6,000.00 

Reserve  for  Depreciation,  Factory   Equipment..  75,000.00 

Accounts  Receivable  75,000.00 

Patents   1.00 

Patterns    25,000.00 

Auto   Trucks    10,000.00 

Bonds    Issued    200,000.00 

Premium  on   Bonds   Issued 2,000.00 

Inventory,  Raw   Material    180,000.00 

Inventory,  Finished    Goods    40,000.00 

Inventory,  Goods   in    Process 70,000.00 

Reserve  for  Depreciation,  Auto  Trucks 4,000.00 

Surplus,  January  1,   1918 50,000.00 

1918  Operating  Profit  and  Loss 67,501.00 

$1,458,501.00     $1,458,501.00 

The  preferred  capital  stock  was  $400,000.00,  7  per  cent,  cumulative,  and 
the  provisions  of  its  issue  require  that  3  per  cent,  of  the  authorized  amount 
be  set  aside  annually  as  a  sinking  fund  for  its  redemption  at  $125.00. 

The  common  capital  stock  of  the  company  is  without  par  value;  20,000 
shares  have  been  authorized ;  12,000  shares  issued. 

The  Real  Estate  account  is  found  to  consist  of  the  following  items : 

Factory  Real   Estate $  20,000.00 

Fertile  Farms  Investment 120,000.00 

City   Real   Estate   Investment 110,000.00 

The  bonds  of  the  company  are  twenty-year,  7  per  cent,  gold  bonds,  sold  on 
September  30,  1918,  for  101.    Interest  is  payable  October  1  and  April  1.    The 
bond  recital  provides  for  the  creation  of  a  pro-rata  sinking  fund  to  be  reserved - 
out  of  the  profits  of  each  year  and  for  the  setting  aside  of  cash  equivalent  to 
such  reservation. 

The  income  taxes  for  the  year  are  estimated  at  $5,000.00, 

You  learn  that  the  directors  met  on  January  10,  1919,  and  declared  a  divi- 
dend of  7  per  cent,  upon  the  preferred  stock,  authorized  the  purchase  of  shares 
of  preferred  stock  in  accordance  with  the  terms  of  issue  and  declared  a  divi- 
dend of  two  dollars  ($2.00)  per  share  of  common  stock.  The  dividends  were 
paid  on  January  15,  1919,  and  the  preferred  stock  was  purchased  on  that  date. 

In  view  of  the  above  conditions,  you  are  asked  to  prepare  a  financial  state- 
ment of  the  Winner  Manufacturing  Company  as  of  January  1,  1919,  after  the 
books  for  the  year  have  been  closed  finally. 


PROBLEM  53 
(Illinois,  December,  1918) 

You  are  called  upon  to  examine  the  accounts  of  a  corporation  for  the  pur- 
pose of  certifying  its  balance  sheet.  An  item  is  carried  on  the  liability  side 
described  "Sundry  Reserves — $375,000.00."  You  find  that  this  amount  is 
made  up  as  follows : 

Reserves  for  Contingencies $  50,000.00 

Plant  Depreciation  Reserve 80,000.00 

Reserve  for  Bad  Debts   10,000.00 

Reserve  for  Collection   Expenses   15,000.00 

Premium  on  Sale  of  Capital  Stock 12,000.00 

Reserve  for  Personal  Injury  Suit  which  has  just  been  decided 

against  the  Company 8,000.00 

Reserve  for  Patent  Litigation  Pending 20,000.00 

Reserve  for  Income  and  War  Excess  Profits  Taxes 40,000.00 

41 


special  Reserve  against  a   Possible   Drop  in   Market  Values   of 

Merchandise  on   Hand 30,000.00 

Sinking  Fund  for  Retirement  of  Bonds 48,000.00 

Provision  against  Dismantlement  of  Aurora  Works 34,000.00 

Pension  Fund   28,000.00 

$375,000.00 
The  president  is  unwilling  to  change  the  company's  balance  sheet  without 
consulting  the  Board  of  Directors  and  states  that  if  you  take  exception  to  this 
item  you  should  write  him  with  your  views  so  that  he  may  bring  the  matter 
formally  before  them.  Write  such  a  letter,  stating  clearly  the  reasons  for  any 
exceptions  you  may  take. 

PROBLEM  54 
(Iowa,  1918) 

The  Jones  Company,  Incorporated,  acquired  the  business  from  S.  R.  Jones, 
who  took  bonds  amounting  to  $50,000.00  in  part  payment.  These  mature  in 
twenty  years,  and  can  be  cancelled  by  payment  after  fifteen  years,  and  bear 
interest  at  the  rate  of  5  per  cent,  per  annum.  A  sinking  fund  is  to  be  estab- 
lished for  their  redemption  by  payment  to  the  Bankers  Trust  Co.,  Trustees, 
of  $2,500.00  a  year,  the  interest  on  this  fund  to  accumulate  to  help  in  retiring 
the  bonds  before  twenty  years. 

November  30,  1918,  was  the  end  of  the  first  fiscal  year  and  the  trial  bal- 
ance of  that  date  is  as  follows : 

Real  Estate    $  30,000.00 

Buildings   30,000.00 

Machinery   43,150.00 

Accounts  Receivable  4,260.00 

Cash    : 12,759.60 

Merchandise    46,540.00 

Labor   • 20,000.00 

Office  Expense  1,950.00 

Miscellaneous  Investments  440.00 

Bond   Sinking   Fund 2,500.00 

Interest  Paid  on  Bonds 3,000.00 

Capital    Stock    $  50,000.00 

Bonds   Payable    50,000.00 

Net  Sales    68,090.00 

Notes  Payable  5,000.00 

Accounts   Payable    21,450.00 

Miscellaneous  Income   60.00 

$194,600.00    $194,600.00 

Inventory  of  merchandise  is  $28,500.00. 

Under  date  of  May  30,  1918,  the  company  paid  the  Bankers  Trust  Co. 
$2,500.00.  Under  date  of  November  30,  1918,  the  Bankers  Trust  Co.  reported 
that  they  had  received  the  $2,500.00;  that  on  June  15,  1918,  they  purchased 
two  $1,000.00  bonds  at  par  and  accrued  interest.  Rate  of  interest  5  per  cent., 
payable  in  November  and  May  each  year,  that  they  collected  $50.00  interest 
on  November  1,  1918,  and  that  they  have  allowed  4  per  cent,  interest  per 
annum,  computed  semi-annually,  on  the  lowest  amount  of  cash  in  the  fund 
during  the  period. 

They  show  the  cash  in  the  fund  which  you  are  asked  to  compute  from  the 
above  to  verify  the  correctness  of  their  balance. 

(1)  Make  the  necessary  journal  entries  to  close  the  books  for  the  fiscal 
year. 

42 


(2)  Construct  income  and  expense  accounts  for  the  year. 

(3)  Construct  balance  sheet  as  of  November  30,  1918. 

(4)  Prepare  statement  of  sinking  fund  in  hands  of  Bankers  Trust  Co, 


PROBLEM  55 

1.  From  the  data  given  below  state  clearly  and  explain  at  least  three 
different  methods  of  arriving  at  the  amount  to  charge  annually  for  the  depre- 
ciation of  any  one  or  all  of  the  following  items : 

Items                                            Value  Estimated  Life  Scrap  Value 

Buildings    $50,000.00                SO  years  $1,000.00 

Machinery    20,000.00                20  years  2,000.00 

Tools   5,000.00                  5  years  100.00 

Patterns    10,000.00                  3  years  100.00 

(Wisconsin,  1915) 

2.  The  A  Manufacturing  Company  has  four  general  types  of  depreciable 
assets : 

Rate  Cost  Scrap  Value 

Buildings   2%  $51,000.00  $1,000.00 

Machinery  A   10%  11,000.00  1,000.00 

Machinery  B    20%  12,000.00  2,000.00 

Office    Equipment    10%  4,100.00  100.00 

The  directors  desire  to  keep  but  one  Reserve  for  Depreciation  Account 
and  ;'equest  you  to  determine  the  composite  rate  which  may  be  used  in  deter- 
mining the  annual  depreciation  charge. 

Determine  the  composite  rate  as  requested,  tabulate  the  necessary  facts 
used  in  determining  it,  and  comment  upon  the  practicability  of  such  a  plan. 
(Wisconsin,  1919.) 

3.  A  coal  company  owns  4,000  acres  of  coal  land  with  a  four-foot  seam 
of  workable  coal.  The  land  cost  $200.00  per  acre  and  the  company  has  spent 
$100,000.00  in  development,  equipment,  etc.  How  much  depreciation  should 
be  charged  against  each  ton  of  coal  mined? 

A  lumber  company  owns  a  3,000-acre  tract  of  timber  cruised  at  6,000  feet 
to  the  acre.  The  mill  and  timber  cost  $105,000.00.  The  salvage  value  of  the 
mill  is  estimated  at  $3,500.00  and  the  land  valued  at  $15,000.00.  How  much 
depreciation  should  each  one  thousand  feet  of  lumber  carry? 

A  coal  company  leases  land  in  which  they  are  to  pay  a  minimum  royalty 
of  $25,000.00  a  year.  Their  royalty  contract  is  based  on  a  production  of  ten 
cents  per  ton.  Any  year  that  the  royalty  does  not  amount  to  $25,000.00  they 
have  a  right  to  make  up  this  shortage  before  they  pay  more  than  the  mini- 
mum royalty  in  any  two  succeeding  years.  Explain  how  you  would  handle 
this  on  the  books  of  the  coal  company  so  that  the  royalty  account  would  show 
properly.  The  actual  royalty  for  the  first  year  is  $20,000.00,  for  the  second 
year  $22,000.00  and  for  the  third  year  $30,000.00.  Prepare  the  journal  entry 
to  explain  your  answer. 

An  oil  company  owns  property  with  a  new  well  producing  100  barrels 
per  day.  This  property  cost  $50,000.00.  What  in  your  opinion  would  be  a 
just  percentage  of  the  cost  of  the  leasehold  for  depreciation  for  the  first  year 
and  so  on  until  the  end  of  six  years?    (West  Virginia,  1917.) 


43 


PROBLEM  56 

1.  A  manufacturing  concern  has  annually  for  the  past  six  years  made 
provision,  at  the  rate  of  10  per  cent,  per  annum,  for  depreciation  of  its  plant 
and  machinery,  crediting  the  amount  of  such  depreciation  to  a  suitable  re- 
serve account.  During  the  year  an  engine  which  cost  originally  $5,000.00 
was  replaced  by  an  improved  engine  costing  $6,800.00.  The  cost  of  the  new 
engine  was  charged  to  Machinery  Account  at  time  of  purchase.  $300.00  was 
realized  from  the  salvage  of  the  old  engine,  this  amount  being  credited  to 
"Scrap  Sales"  when  received,  and  later  closed  to  Profit  and  Loss. 

Draft  the  adjustment  entries  which  you  consider  necessary  and  explain 
the  principle  upon  which  these  entries  are  based.     (Ohio,  1918.) 

2.  An  engine  installed  in  a  factory  January  1,  1914,  at  a  cost  of  $1,000.00 
is  replaced  by  one  of  larger  capacity  December  31,  1917,  costing  (second 
hand)  $2,800.00.  The  discarded  machine  was  sold  for  $900.00.  The  cost  of 
making  the  change  was  $200.00.  It  has  been  the  practice  of  the  company  to 
charge  ofif  10  per  cent,  depreciation  annually  (on  the  diminishing  basis)  car- 
rying the  credit  to  a  Depreciation  Reserve  Account.  Make  the  necessary 
journal  entries.     (Illinois,  1918.) 

3.  A  machine  costing  $12,000.00  was  estimated  to  have  a  life  of  twelve 
years,  with  a  residual  value  of  $1,500.00.  At  the  close  of  each  year  a  charge 
of  $875.00  was  made  to  depreciation  and  a  like  amount  credited  to  "Reserve 
for  Depreciation."  Just  prior  to  olosing  the  books  at  the  end  of  the  twelfth 
year  the  machine  was  discarded  and  sold  for  $2,000.00  (cash)  and  a  similar 
machine  was  bought,  costing  $16,000.00. 

Show  the  journal  entries  you  would  make  to  close  the  books  at  the  end  of 
the  twelve  years  in  order  to  close  these  transactions  and  to  make  necessary 
adjustments.     (Indiana,  1918.) 

4.  In  the  Machinery  Account  of  a  company  under  audit  you  find  the  fol- 
lowing: 

Balance  at  Beginning  of  Year $  30,000.00 

Purchase  of  Two  Machines,  Type  A,  including  Freight 6,000.00 

Cost  of  Removing  a  Discarded  Machine,  Type  B,  to  Make  Room 

for   New   Machine 125.00 

Cost  of  InstaUing  Two  New  Machines 200.00 

Alterations  to  4  Type  C  Machines,  Made  Necessary  by  Change 

of   Product 500.00 

Cost  of  Moving  Two  Machines  from  Building  A  to  Building  B 
to  Permit  of  More  Economical  Operation,  Including  Re- 
installation      205.00 

Sale  of  Old  Machine,  Type  A  (Less  Freight  and  Cost  of  Removal)  150.00 

Sale  of  Old  Type  B  Machine 1,100.00 

The  balance  of  the  Reserve  for  Depreciation  (Machinery)  Account  shows 
an  increase  for  the  year  of  the  year's  depreciation  charge  computed  at  the 
rate  of  6  per  cent,  on  the  balance  of  the  Machinery  Account  at  the  beginning 
of  the  year. 

You  are  asked  to  make  the  adjustment  entries  necessary  to  correct  the 
account.     (Adapted  from  Indiana,  1918.) 

5.  The  Machinery  Account  on  the  books  of  the  X  Company  was  deb- 
ited with  $10,000.00  on  January  1,  1917.  Depreciation  had  not  been  consid- 
ered upon  the  books  up  to  this  date.  On  June  1,  1917,  new  machinery  was 
purchased  for  $3,000.00  and  on  September  1  old  machinery  was  scrapped,  the 
cost  price  of  which  was  $3,000.00.  The  machinery  is  estimated  to  last  five 
years.    Depreciation  is  figured  on  the  fixed  proportion  method,  no  scrap  value. 

In  may,  1918,  the  additional  equipment,  amounting  to  $2,000.00,  is  pur- 

44 


chased.    At  the  end  of  1918  the  management  decides  to  use  the  sum-of-year 
digits  method  for  calculating  depreciation. 

Give  all  entries  required  by  the  above  citation  of  facts. 

PROBLEM  57 
(Wisconsin,  1915) 
In  your  examination  of  the  Automobile  Delivery  Truck  Account  of  a  com- 
pany you  find  the  following  entries: 

Debits 

Jan.     1,  1914,  Trucks  1,  2,  3,  4,  at  $1,200.00 $  4,800.00 

July    1,  1914,  Truck  5    1,500.00 

Aug.    1,  1914,  Truck  6   * 1,500.00 

Credits 

Aug.  1,  1914,  Truck  2    $     900.00 

Sept.  1,  1914,  Truck  4    750.00 

Balance,  Sept.  1,  1914 6,150.00 

The  Reserve  for  Depreciation  for  Automobile  Delivery  Truck  Account 
stood  credited  on  January  1,  1914,  with  $1,800.00. 

Upon  analyzing  the  transactions  represented  by  these  items,  you  find  the 
following  facts: 

a.  Truck  5  purchased  July  1,  replaced  Truck  1.  The  portion  of  the  re- 
serve for  depreciation  accumulated  on  January  1  for  Truck  1  amounted  to 
$900.00.    Truck  5  was  purchased  on  open  account. 

b.  Truck  2  was  traded  in  for  $850.00  on  the  purchase  of  Truck  6,  costing 
$1,500.00.  The  difference  was  paid  in  cash.  The  reserve  which  had  been  ac- 
cumulated for  depreciation  on  Truck  2  on  January  1  amounted  to  $300.00. 

c.  Truck  4  was  totall}-  destroyed  in  an  accident  September  1.  The  re- 
serve for  depreciation  on  this  truck  amounted  on  January  1  to  $300.00  and  it 
was  insured  for  $750.00. 

Assume  the  rate  of  depreciation  to  be  25  per  cent,  per  year. 
Give  journal  entries  which  would  properly  record  the  above  facts  and 
show  the  balances  of  all  accounts  affected,  as  of  September  1,  1914. 

PROBLEM  58 
(Illinois,  May,  1910) 

A  factory  consists  of  two  blocks  of  buildings,  "A"  and  "B."  On  the  first 
of  January,  1907,  "A"  contains  engine  and  boiler  which  cost  $4,000.00,  and 
machinery  costing  $13,000.00;  "B"  contains  machinery  costing  $7,000.00.  The 
following  are  purchases  of  machinery : 

October  1st.  1907.  "A,"  $1,000;  July  1st,  1908.  "A,"  $750;  "B,"  $1,500;  April  1st. 
1909.  "A,"  $600;  "B,"  $900;  October  1st,  1909,  "B."  $250. 

On  January  1st.  1908,  machinery  (costing  January  1st,  1907,  $1,000)  is  sold  from 
"A"  for  $625,  and  on  July  1st,  1908,  machinery  (costing  $1,300  January  1st,  1907)  is  sold 
from  "B"  for  $1,000. 

The  accounts  are  made  up  to  December  31  each  year.  On  December  31, 
1909,  the  whole  premises  and  contents  are  destroyed  by  fire,  and  the  fire  in- 
surance company  agrees  to  pay  upon  the  following  basis :  Engine  and  boiler, 
cost  price  less  depreciation  8  per  cent,  per  annum  upon  that  sum ;  machinery 
in  "A,"  cost,  less  depreciation  at  10  per  cent,  per  annum  upon  diminishing 
value:  machinery  in  "B,"  cost,  less  depreciation  at  lYz  per  cent,  per  annum 
upon  diminishing  value. 

Prepare  ledger  accounts  showing  how  much  is  recoverable  upon  this  basis. 

45 


PROBLEM  59 
(Wisconsin,  1918) 

In  an  audit  of  the  Acme  Motor  Car  Company  you  find  the  Reserve  for  De- 
preciation Account  and  the  Surplus  Account  composed  of  the  items  as  here 
enumerated. 

The  Reserve  for  Depreciation  Account  was  opened  on  December  31,  1915, 
the  close  of  the  first  business  year,  by  debiting  the  depreciation  accounts  of 
the  various  assets  w^ith  $265,000.00. 

The  Reserve  for  Depreciation  Account  was  also  credited  with  $25,000.00 
on  December  31,  1916,  and  with  $20,000.00  on  December  31,  1917. 

During  1916  and  1917  the  following  items  have  been  charged  against  this 
Reserve  for  Depreciation  Account: 

Assets  Scrapped   $125,000.00 

Bad  Debts    25,000.00 

Repairs   10,000.00 

Fire  Loss  on  Building  and  Equipment 7,500.00 

Organization   Expenses    65,000.00 

Salesmen's   Extra   Commission 12,000.00 

The  Surplus  Account  for  1915  and  1916  has  been  closed,  the  balance  having 
been  paid  out  in  dividends. 

The  Surplus  Account  on  December  31,  1917,  is  found  to  consist  of  the  fol- 
lowing credit  items : 

Reserve  for  Car  Guarantees $  50,000.00 

Premium  on  Stock  Sold 50,000.00 

Reserve   for   Obsolescence 50,000.00 

Bonus  from  Commercial  Club 50,000.00 

Reserve  for  Income  and  Excess  Profits  Taxes,  1917 80,000.00 

Operating   Profits    750,000.00 

You  are  requested  to  make  such  adjustments  in  the  Reserve  for  Deprecia- 
tion Account  and  Surplus  Account  as  are  appropriate,  and  to  show  how  the 
several  items  and  accounts  should  appear  in  the  financial  statement. 


PROBLEM  60 

In  the  examination  of  the  books  of  the  A  Company  it  is  found  that  the 
Equipment  Account,  the  Reserve  for  Depreciation  Account  and  the  Operat- 
ing Expense  Accounts  have  been  improperly  kept.  Charges  which  should 
have  been  made  against  the  Reserve  for  Depreciation  Account  have  been 
made  in  some  cases  to  the  Operating  Expense  Account  and  in  other  cases  to 
the  Asset  Account.  Scrapped  assets  have  been  allowed  to  remain  in  the 
Asset  Accounts  at  original  cost. 

The  following  data  are  given  with  the  request  that  the  proper  adjustment 
entries  be  made  so  that  the  Equipment  Account,  the  Reserve  for  Deprecia- 
tion Account,  and  the  net  effect  upon  the  operating  profit  for  each  year  will 
be  clearly  shown. 

Type  A  equipment  purchased  in  1917  to  the  amount  of  $100.00  was  charged 
to  the  Asset  Account  when  it  should  have  been  charged  to  the  Reserve  for 
Depreciation  Account.     Likewise  in  1918  $500.00  had  been  so  charged. 

In  1916  replacements  to  Type  B  equipment  amounting  to  $600.00  had  been 
charged  to  the  Equipment  Account  when  it  should  have  been  debited  to  the 
Reserve  for  Depreciation  Account.  In  1917  similar  items  aggregated  $750.00, 
and  in  1918  $350.00. 

Type  C  equipment  was  traded  in  January,  1917,  for  Type  D  equipment. 

46 


Type  D  equipment  is  valued  at  $10,000.00.  The  portion  of  the  Reserve 
for  Depreciation  Account  applicable  to  Type  C  was  found  to  be  $8,500.00. 
However,  a  loss  of  only  $5,000  was  suffered  when  the  machinery  was  traded. 

Type  E  equipment  contains  charges  to  the  amount  of  $5,000.00  which 
should  have  been  charged  against  the  Reserve  for  Depreciation  Account.  The 
amounts  of  the  several  years  are  as  follows:  1916,  $1,500.00;  1917,  $2,000.00; 
1918,  $1,500.00. 

An  analysis  of  the  Factory  Repair  Account  shows  that  during  1916  items 
amounting  to  $2,000.00  had  been  charged  to  this  account  which  should  have 
been  charged  against  the  Reserve  for  Depreciation  Account.  In  1917  similar 
items  totalled  $2,500.00,  and  in  1918  $1,750.00. 

The  rates  of  depreciation  are  as  follows :  Type  A,  10  per  cent. ;  Type  B, 
20  per  cent.,  and  Type  D,  25  per  cent. 

PROBLEM  61 
(Wisconsin,  May,  1919) 

The  A  Company  had  an  appraisal  made  early  in  January,  and  after  com- 
pleting the  annual  audit  for  the  A  Company  the  Directors  authorize  you  to 
record  upon  the  books  the  proper  values  as  given  in  the  appraisal.  Among 
the  terms  used  in  the  appraisal  company's  report  are  the  following: 

1.  Sound  Value 

2.  Depreciated  Value 

3.  Replacement  Value 

4.  Insurable  Value 

5.  Book  Value 

Define  each  of  these  terms  and  state  definitely  just  what  values  it  would 
be  proper  to  record  upon  the  books. 

What  adjustment  account  or  accounts  would  be  used  in  the  work  and  what 
disposition  should  be  made  of  any  balances  remaining  in  such  account  or 
accounts  ? 

PROBLEM  62 

(Massachusetts,  October,  1914) 

The  following  is  a  trial  balance  of  Blank  Manufacturing  Company  at  De- 
cember 31,  1913,  before  closing: 

Land    $    2,000.00 

Buildings    25,250.00 

Machinery  and  Equipment 31,120.00 

Materials  Used  in  Manufacture 35,930.00 

Wages    13,560.00 

Salaries    3,500.00 

Repairs   740.00 

Insurance  and  Taxes 850.00 

Office  Expenses   1,560.00 

Depreciation   1,200.00 

Accounts    Receivable    24,130.00 

Accounts  Payable    $  17,820.00 

Bank  Loans   5,000.00 

Inventory,  December  31,  1913 8,210.00 

Accrued  Interest   150.00 

Interest    150.00 

Sales    74,610.00 

Trade  Discounts  on  Sales 1,730.00 

Capital    50,000.00 

Surplus  2,350.00 

$149,930.00    $149,930.00 
47 


An  appraisal  was  made  of  the  plant  as  of  December  31,  1913,  which  showed 
the  following  values : 

Replacement  Depreciation 
Value  Value 

Land    $  1,800.00 

Buildings   30,000.00  $27,000.00 

Machinery  and  Equipment 42,000.00  33,600.00 

The  Board  of  Directors  approve  the  appraisal  values,  and  pass  a  resolution 
to  change  the  books  to  agree  therewith. 

1.  Prepare  journal  entries  to  adjust  the  books  to  agree  with  values  shown 
by  the  appraisal. 

2.  Prepare  balance  sheet  and  Profit  and  Loss  Account  after  giving  effect 
to  the  appraisal  adjustment. 


PROBLEM  63 

(Wisconsin,  1916) 

The  Wisconsin  Hardware  Company  is  to  l)e  organized  as  follows :  A  and 
B  are  equal  partners  in  a  retail  hardware  business,  the  financial  condition  of 
which  is  shown  by  the  following  balance  sheet : 

Assets 

Cash  on  Hand  and  in  Bank $  2,000.00 

Accounts    Receivable    4,000.00 

Merchandise    6,000.00 

Fixtures    400.00 

Shop  Tools    300.00 

Delivery  Equipment   300.00 

Total  Assets    $13,000.00 

Liabilities  and  Capital 

Accounts   Payable    $  1,000.00 

A— Investment  6,000.00 

B— Investment  6,000.00 

$13,000.00 
The  above  net  worth  is  to  be  combined  with  $6,000.00  cash  to  be  brought 
in  by  C,  and  the  Wisconsin  Hardware  Company  is  to  be  formed  and  is  to 
issue  $18,000.00  of  full  paid  stock.  $6,000.00  each  to  A,  B  and  C  in  payment 
for  their  respective  contributions. 

Immediately  upon  the  formation  of  the  new  firm  the  company  i?  to  pur- 
chase the  business  of  a  competing  hardware  store  in  the  same  city,  and  to 
continue  its  operation  as  a  second  store  imder  the  name  "Badger  Hardware 
Store." 

The  "Badger"  store  inventory  is  as  follows : 

Stock  of  Merchandise $  6,500.00 

Fixtures   200.00 

Delivery  Equipment 350.00 

Total  to  be  Taken  Over $  7,050.00 

The  stockholders  expressly  instruct  the  accountant  to  design  an  account- 
ing system  so  that  each  store  may  keep  its  own  set  of  books,  pay  its  own  bills, 
have  its  own  cash  account  and  bank  account  and  prepare  its  own  detailed 
operating  and  financial  statements  at  the  end  of  each  month. 

The  accounts  of  the  Wisconsin  Hardware  Company  must  be  so  arranged 
as  to  reflect  the  ownership  and  operating  profits  or  losses  of  the  Badger  store. 

48 


Triplicate  sales  books  are  to  be  used  at  each  store.     These  will  supply  the 
individual   accounts   receivable   accounts,   and   the   system   designed   should 
recognize  the  use  of  the  sales  book  slips  for  other  purposes. 
Keeping  in  mind  the  above  facts : 

a.  Design  a  classification  of  accounts  for  the  Wisconsin  Hardware  Com- 
pany's main  store. 

b.  Sketch  the  rulings  of  such  books  of  original  entry  as  you  deem  ad- 
visable. 

c.  Give  the  necessary  journal  entries  to  record  the  conversion  of  the  part- 
nership into  a  corporation  upon  the  new  books. 

d.  Give  the  necessary  journal  entries  to  record  the  purchase  of  the 
"Badger  Hardware  Store." 

e.  Give  the  entries  necessary  to  open  the  books  at  the  "Badger  Hard- 
ware Store." 

f.  Outline  a  method  of  approximately  determining  monthly  profits  where 
physical  inventory  of  stock  is  taken  but  once  a  year,  and  draft  form  of  oper- 
ating statement  suitable  for  main  store. 

PROBLEM  64 
(Wisconsin,  1916) 

As  accountant  to  a  coal  mine  you  are  instructed  to  prepare  estimates  of 
the  cash  balances  at  the  close  of  each  of  the  succeeding  six  months.  The  fol- 
lowing details,  averages  of  the  past  years,  are  available : 

Cost  of  Mining $0.5107  per  ton 

Current   Selling  Price 75       per  ton 

Assume  that  the  mine  starts  operation  January  1  after  having  been  shut 
down,  that  there  was  $50,000.00  cash  in  bank  at  that  date,  that  mining  will  be 
at  the  rate  of  80,000  tons  per  month,  that  all  labor  and  supplies  are  paid  for 
in  cash,  and  that  the  company  has  contracts  for  delivery  of  60,000  tons  per 
month,  payable  the  following  month. 

a.  Prepare  an  estimate  of  monthly  cash  balances,  January  31  to  June  30. 

b.  What  are  the  profits  for  the  six  months? 


PROBLEM  65 

(Massachusetts,  October,  1914) 

A  client  submits  to  you  the  following  statement,  covering  a  period  of  ten 
years,  of  a  long-established  nut  and  bolt  business  which  he  contemplates 
purchasing : 

Sales— Averaging  Per  Year $300,000.00 

Wages— Averaging  Per   Year 100,000.00 

Expenses — Averaging  Per  Year 15,000.00 

Materials  Used — Averaging  Per  Year 115,000.00 

Real  Estate— Appraised  Value 50,000.00 

Machinerv— Two  Years  Old  (Original  Cost) 20,000.00 

Machinerv— Four  Years  Old  ( Original  Cost) 10,000.00 

Machinery— Ten  Years  Old  (Original  Cost) •     20,000.00 

Materials  on   Hand 40,000.00 

From  the  above  figures  write  a  brief  report  to  submit  to  your  client,  set- 
ting forth  the  value  of  the  business,  including  good  will. 

49 


Jar 

I.    2. 

3. 

«' 

4. 

« 

24. 

" 

25. 

... 

26. 

" 

28. 

.1 

29. 

Fet 

).    5. 

" 

10. 

" 

11. 

" 

26. 

PROBLEM  66 
(Illinois,  May,  1913) 

The  accounting  firm  of  C,  P  &  A  employ  you  as  a  senior  accountant  and 
for  your  initial  job  requires  you  to  draft  a  Bills  Receivable  Account  and  a 
Bills  Payable  Account  from  memoranda  taken  from  the  diary  of  a  client,  who 
is  an  expert  broker,  as  follows : 
1912 

Took  G.  D.'s  Note,  90  Days'  Settlement  of  Account $    600.00 

Accepted  M.  O.'s  30-day  Draft,  Documents  Attached  for  goods  Shipped 

Me  from   Paris 1,945.00 

Received   from   Bank  of   Havana  60-day   Draft,   for    Proceeds   of   Ac- 
counts Collected  by  Them 425.00 

Received  from  B.  A.  Note  at  30  Days  on  Settlement  of  Account 650.00 

Drevvr  on  C.  M.  15  Days  from  Date  for  Account  of  Goods  Shipped  to 

London  350.00 

Accepted  L.  H.'s  Draft,  60  Days  Sight 750.00 

Received  C.  M.'s  Draft,  Accepted  January  26th 350.00 

Discounted  G.  D.'s  Note  at  Bank,  Received 591.25 

Paid  M.  O.   Draft 

Discounted  Bank  of  Havana  Draft,  Received 411.65 

C.  M.  Draft  Returned 

B.  A.  Note  Paid. 
Draft  the  said  accounts. 

PROBLEM  67 
(Illinois,  1907) 

In  1895  the  Chicago  Manufacturing  Company  purchase  real  estate  costing 
$12,000.00,  erect  a  building  for  $30,000.00,  and  purchase  machinery  costing 
$25,000.00.  No  further  purchases  are  made,  and  on  January  1,  1905,  a  balance 
sheet  of  the  company  discloses  the  following  condition : 

Assets 

Real   Estate    $  12,000.00 

Buildings    30,000.00 

■  Machinery    25,000.00 

Merchandise   Inventory    60,000.00 

Accounts  Receivable   75,000.00 

Cash    10,000.00    $212,000.00 

Liabilities 

Capital  Stock $150,000.00 

Surplus   23,500.00 

Reserve  for  Depreciation: 

On  Buildings 7,500.00 

On  Machinery   15,000.00 

Accounts   Payable    16,000.00     $212,000.00 

On  May  16,  1905,  their  factory  is  burned  down,  a  total  loss  ensuing.  Their 
books  of  account  as  on  that  date  show  the  following  ledger  balances : 

Debit  Balances 

Real  Estate  $  12,000.00 

Buildings    30,000.00 

Machinery    25,000.00 

Merchandise  Inventory,  January  1,  1905 60,000.00 

Purchases    150,000.00 

Labor  and  Other  Factory  Cost 60,000.00 

General   Expenses    45,000.00 

Accounts  Receivable   73,000.00 

Cash    32,000.00    $487,000.00 


50 


Credit  Balances 

Capital  Stock  $150,000.00 

Surplus   23,500.00 

Reserve  for  Depreciation: 

On  Buildings   7,500.00 

On  Machinery   15,000.00 

Sales   (Net)    280,000.00 

Accounts   Payable    11,000.00     $487,000.00 


For  the  years  1902  and  1904  their  books  showed  a  gross  profit  on  manu- 
facturing averaging  25  per  cent,  of  the  net  sales.  The  company,  however, 
only  succeeds  in  obtaining  $55,000.00  from  the  fire  insurance  companies  for 
merchandise  lost. 

In  respect  to  the  buildings  and  machinery  the  companies  acknowledge  that 
the  cost  of  replacing  same  would  be  10  per  cent,  higher  in  1905  than  in  1895, 
and  after  taking  this  fact  into  consideration  and  determining  what  they  con- 
sider fair  depreciation  they  settle  these  two  items  as  follows :  Building  $28,- 
000.00,  machinery  $17,500.00.  x  The  company  erects  a  new  building  costing 
$40,000.00  and  purchases  machinery  costing  $35,000.00,  and  finding  that  the 
value  of  its  real  estate  is  now  $24,000.00  it  makes  book  entry  to  so  record  it. 

Prepare  cash  book  and  journal  entries  to  properly  record  all  of  the  above 
transactions,  losses  or  gains  due  to  fire,  actual  trading  profit  from  January  1, 
1905,  to  date  of  fire,  and  balance  sheet  after  making  all  above  entries.  For 
purposes  of  this  question  assume  no  accounts  receivable  collected  or  accounts 
payable  paid. 


PROBLEM  68 

(Florida,  1915) 

The  store  and  stock  of  the  Diamond  Jewelry  Company  was  destroyed  by 
fire  on  November  1.  The  safe  was  opened  and  books  Avere  recovered  intact. 
The  trial  balance  taken  off  was  as  follows: 

Cash  in   Bank $  1,000.00 

Accounts  Receivable   10,000.00 

Accounts    Payable    $  30,000.00 

Merchandise  Purchases    90,000.00 

Furniture  and   Fixtures 7,500.00 

Sales    110,000.00 

General   Expense    18,000.00 

Insurance     1,500.00 

Salaries    5,500.00 

Real  Estate— Store  Lot     50,000.00 

Store   Building    35,000.00 

Capital  Stock  50,000.00 

Surplus  28,500.00 

$218,500.00    $218,500.00 

The  average  gross  profit  as  shown  by  the  books  and  accepted  by  the  insur- 
ance companies  was  40  per  cent,  of  sales.  The  insurance  adjuster  agreed  to 
pay  75  per  cent,  of  the  book  value  of  furniture  and  fixtures.  90  per  cent,  of  the 
book  value  of  the  store  building,  and  the  entire  loss  on  merchandise  stock. 

Draft  journal  entries  to  include  the  account  against  the  insurance  com- 
panies, and  construct  final  profit  and  loss  account  and  balance  sheet. 

51 


PROBLEM  69 
(Wisconsin,  November,  1919) 

On  October  31,  1919,  the  store  of  the  Good  Merchandise  Company  was 
destroyed  by  fire.  It  was  a  total  loss.  The  books  and  records  were  found  to 
be  complete  and  the  trial  balance  built  up  as  of  October  31  was  as  follows : 

Accounts  Receivable   $  7,000.00 

Accounts   Payable    $     5.000.00 

Cash    2,000.00 

Mdse.  Inventory,  January  1,  1919 15,000.00 

Mdse.  Purchases  85,000.00 

Real   Estate    3,000.00 

Dividends  Paid   4,000.00 

Buildings  and   Fixtures 18,000.00 

Furniture  and  Furnishings 5,000.00 

Reserve  for  Depreciation,  Bldgs.  and  Fix 3,000.00 

Reserve  for  Depreciation,  Furn.  and  Furn 300.00 

Unexpired   Insurance    2,500.00 

Mdse.   Sales    , 99,000.00 

Miscellaneous   Income    1,500.00 

Clerks'    Salaries    5,000.00 

Light,  Heat  and  Power 1,000.00 

Advertising   2,000.00 

Office  Salaries  2,500.00 

Officers'   Salaries    5,000.00 

Postage    700.00 

Treasury  Stock  10,000.00 

Taxes    2,500.00 

Telephone   and  Telegrams 150.00 

Sundry   General    Expense 500.00 

Capital  Stock  50,000.00 

Surplus   12,050.00 


$170,850.00    $170,850.00 
An  average  gross  profit  of  33^  per  cent,  was  agreed  upon  by  all  parties 
concerned. 

Stock,  buildings,  fixtures  and  furnishings  were  insured  under  the  80  per 
cent,  clause,  the  building,  etc.,  for  $15,000.00  and  the  stock  for  $32,000.00.    Set- 
tlement is  made  on  the  basis  of  these  facts. 
You  are  asked  to  give : 

a.  The  profit  or  loss  due  to  fire. 

b.  The  operating  statement  for  the  period  ending  October  31. 


PROBLEM  70 

The  A  Company  operates  four  camps  and  has  its  property  insured  under 
the  average  clause  and  also  under  the  80  per  cent,  co-insurance  clause.  The 
amount  of  insurance  carried  is  $13,125.00,  and  a  fire  loss  of  $415.69  has  oc- 
curred in  Camp  No.  1. 

The  sound  property  valuations  are  as  follows : 

Camp  No.  1 $  3,022.99 

Camp  No.  2 10,708.61 

Camp  No.  3 9,9.53.90 

Camp  No.  4 14.879.05 

Total   $38,564.55 

The  insurance  policies  carried  in  the  several  companies  are  as  follows: 

52 


Company  A $  1,625.00 

B    2.500.00 

C    5,000.00 

D    2,500.00 

E    1,500.00 

$13,125.00 
You  are  asked  to  determine  the  portion  of  the  loss  which  the  assured  con- 
tributes and  to  apportion  the  claim  among  the  five  companies, 

PROBLEM  71 
(New  York,  June,  1914) 

John  Adams  lost  his  stock  of  merchandise  May  1,  1914,  through  a  flood  in 
the  Mississippi  River. 

Adams  applied  to  the  local  Mutual  Flood  Insurance  Society  for  reimburse- 
ments, claiming  a  loss  of  $5,886.35  on  merchandise  stock.  From  the  following 
data  ascertain  his  merchandise  inventory : 

Net  profits  May  1,  1914,  $4,452.91;  drawings,  $1,598.00;  legal  expenses, 
$17.50;  interest  debit,  $313.00;  advertising,  $14.00;  commissions  debit,  $961.01 ; 
insurance,  $196.23;  sales,  $81,688.04;  inventory  December,  1911,  $1,568.62; 
purchases,  $55,415.82;  labor,  productive,  $19,499.58;  telephone,  $416.06;  sundry 
factory  expenses,  $3,201.92;  repairs,  $16.00;  surplus  May  1,  1914,  $2,854.91. 

PROBLEM  72 

(Adapted  from  English  Final  Examination,  May,  1912) 
The  Alpha  Manufacturing  Company  had  an  authorized  capital  of  $100,- 
000.00,  divided  into  600  "A"  shares  and  400  "B"  shares  of  $100.00  each,  of 
which  500  "A"  and  250  "B"  shares  were  issued  and  fully  paid  up.  The  com- 
pany's articles  provided  that  the  profits  should  be  divided  as  follows,  so  far 
as  the  directors  might  decide : 

1.  In  payment  of  a  cumulative  dividend  of  10  per  cent,  on  the  "A"  and 
20  per  cent,  on  the  "B"  shares. 

2.  In  payment  of  a  non-cumulative  dividend  of  15  per  cent,  on  the  "B" 
shares. 

3.  In  payment  of  a  non-cumulative  dividend  of  7^  per  cent,  on  the  "A" 
shares. 

4.  In  payment  of  a  further  dividend  pro  rata,  but  so  that  the  dividend  on 
each  "B"  share  should  be  twice  that  on  each  "A"  share. 

The  profits  for  the  year  1910  amounted  to  $45,000.00,  and  there  was  an  un- 
distributed balance  from  1909  of  $17,500.00. 

The  directors  decided  to  pay  the  dividends  under  1,  2  and  3  above,  and  a 
further  dividend  under  4  of  ^Yz  per  cent,  on  the  "A"  and  15  per  cent,  on  the 
"B"  shares ;  and  to  place  one-half  of  the  balance  to  Reserve  for  Contingencies 
and  carry  the  other  half  forward  to  next  year. 

PROBLEM  73 

(Wisconsin,  1918) 

The  stockholders  of  the  Farmers'  Co-operative  Store  share  the  store's 
earnings  in  proportion  to  purchases  made  during  the  year,  and  "dividends" 
may  be  withdrawn  in  trade  or  in  cash.     The  fiscal  year  corresponds  to  the 

53 


calendar  year,  but  the  dividend  year  runs  from  March  15  to  March  l4. 

a.  The  following  facts  are  given  you  with  the  request  that  you  ascertain 
the  status  of  the  Surplus  Account  on  December  31,  1917,  and  indicate  the  dis- 
position of  any  ''dividends"  which  may  have  been  paid  out  in  excess  of  avail- 
able surplus: 

The  balance  of  the  Reserve  for  "Dividends"  Account  on  December  31, 
1916,  was  $2,540.15.  This  represented  the  "dividends"  which  might  be  with- 
drawn in  cash  during  the  period  January  1,  1917,  to  March  15,  1917. 

The  "dividends"  withdrawn  in  cash  during  the  year  1917  amount  to 
$1,015.37,  and  those  withdrawn  in  trade  during  1917  amount  to  $24,786.29. 
In  order  to  reduce  trade  "dividends"  to  a  cash  basis,  20  per  cent,  is  deducted 
from  the  selling  price  of  goods  so  withdrawn  and  charged  back  against  the 
sales. 

The  balance  of  surplus  available  for  dividends  on  December  31,  1916,  was 
$20,710.43. 

An  examination  of  the  accounts  show  that  "dividends"  to  the  amount  of 
$2,496.63  (cash  basis)  may  be  withdrawn  between  January  1,  1918,  and  March 
14,  1918. 

During  the  period  January  1,  1917,  to  March  14,  1917,  "dividends"  were 
withdrawn  to  the  amount  of  $1,720.15,  cash  basis. 

b.  The  sales  to  members  for  the  year  1917  are  $162,280.00  and  the  net 
profits  are  $20,285.00.  In  your  judgment  what  "dividend"  should  be  declared 
in  trade  and  in  cash  for  the  year  1918? 

c.     Briefly  criticise  the  plan  followed  by  this  company  in  distributing  the 
earnings  to  the  stockholders. 

PROBLEM  74 
(Wisconsin,  1916) 

Corporation  A  issues  50  bonds,  par  value  $50,000.00,  bearing  5  per  cent, 
interest,  payable  annually.  The  bonds  are  numbered  serially,  and  are  to  be 
retired  in  consecutive  groups  of  ten  each  year.  They  are  all  sold  at  date  of 
issue  for  an  average  price  of  $950.00. 

a.  Submit,  in  the  form  of  ledger  accounts,  all  entries  required  to  handle 
this  bond  issue,  in  what  you  consider  the  most  equitable  manner,  from  date 
of  issue  to  retirement. 

b.  Corporation  B  buys  bonds  Nos.  21  to  40,  inclusive,  on  date  of  issue,  at 
$950.00  each,  and  sells  Nos.  21  to  30  at  the  end  of  two  years  for  $1,000.00  each. 
The  other  ten  bonds  are  retired  when  due. 

Submit,  in  the  form  of  ledger  accounts,  all  necessary  entries  in  corpora- 
tion B's  books  for  handling  the  matter  in  what  you  consider  the  most  equitable 
manner. 

PROBLEM  75 
(Wisconsin,  1917) 

On  December  15,  1914,  the  stockholders  of  the  A  Corporation  authorized 
an  issue  of  $100,000.00  ten-year  5  per  cent.  First  Mortgage  Bonds.  These 
bonds  were  sold  on  January  1,  1915,  at  95.  On  January  1,  1916,  another  duly 
authorized  issue  of  $100,000.00  twenty-year  6  per  cent,  bonds  was  sold  at  102. 

In  accordance  with  the  terms  of  the  bond  recitals  the  sinking  fund  install- 
ments were  to  be  invested  in  outside  securities,  and  on  January  1.  1916,  a 
portion  of  the  pro  rata  installment  of  the  first  bond  issue  was  used  in  pur- 
chasing 100  5>4  per  cent,  bonds  of  the  X  Corporation,  at  98.     On  January  1, 

54 


1917,  the  pro  rata  mstallments  were  invested  as  follows:  Issue  No.  1,  100 
6y2  per  cent  bonds  of  the  T  government  at  102.  Issue  No.  2,  50  7  per  cent, 
bonds  of  the  W  government  at  par. 

Draft  the  proper  entries  to  record  the  above  transactions,  and  show  the 
ledger  accounts  and  balances  as  of  January  2,  1917.  Interest  calculations 
need  not  be  given. 

PROBLEM  76 
(New  York,  January,  1914) 

An  investment  bond  house  purchased  10  New  Jersey  Traction  Company 
first  mortgage  5  per  cent,  bonds  at  83^^  ;  10  New  Orleans  Gas  Light  and 
Power  Company  first  mortgage  5  per  cent,  bonds  at  1.04  (accrued  interest  not 
to  be  considered). 

Prepare  the  necessary  entries  to  record  properly  these  transactions  on  the 
books  of  the  bond  house  and  to  facilitate  an  audit. 

PROBLEM  77 
(New  York,  June,  1915) 

The  Smith  &  Jones  Manufacturing  Company  issued  $200,000.00  of  first 
mortgage  50-year  5  per  cent,  sinking  fund  bonds,  which  were  marketed  at 
98^  and  1  per  cent,  commission,  and  expended  the  entire  proceeds  in  the  erec- 
tion of  their  plant.  The  discount  and  commission  were  charged  to  Unamor- 
tized Debt,  Discount  and  Expense  Account,  to  be  subsequently  charged  to 
Profit  and  Loss,  proportionately,  during  the  life  of  the  bonds.  Five  years 
later  the  company  was  enabled,  owing  to  a  disturbance  in  the  financial  mar- 
ket, to  purchase  $50,000.00  of  said  bonds  for  sinking  fund  account  at  95.  Pre- 
pare the  necessary  journal  entries  to  record  correctly  the  above  transactions 
on  the  books  of  the  company. 

PROBLEM  78 
(Wisconsin,  1914  and  1915) 

I.  a.  A  corporation  has  sold  $100,000.00  5  per  cent.  20-year  first  mortgage 
bonds  at  a  premium  of  $4,000.00.  It  also  has  sold  $50,000.00  6  per  cent.  10- 
year  second  mortgage  bonds  at  92.  Using  these  facts  to  illustrate  your  state- 
ments, state  and  explain  the  several  methods  of  accounting  for  premium  and 
discount  on  bonds. 

b.  Assuming  that  your  employer  has  purchased,  as  an  investment,  both 
the  first  and  second  mortgage  bonds  described  in  (a),  set  up  proper  journal 
entries  covering  the  purchase  thereof. 

II.  A  corporation  decided  to  issue  and  sell  bonds  to  the  amount  of  $100,- 
000.00  par  value.  The  denomination  of  such  bonds,  $1,000.00  each;  term  of 
bonds,  fifteen  (15)  years;  interest  rate  5  per  cent.,  payable  semi-annually. 
On  January  1,  1914,  these  bonds  were  sold  for  $105,411.33,  or  on  a  4^^  per 
cent,  return  basis.  July  1,  1914,  interest  was  paid  amounting  to  $2.500.(X). 

a.  What  entrv  should  the  corporation  have  made  when  the  bonds  were 
sold? 

b.  What  entry  should  the  corporation  have  made  when  it  paid  the 
$2,500.00  interest  referred  to  above? 

c.  What  entry  should  the  purchaser  of  these  bonds  have  made  when  he 
received  the  first  interest  payment? 

d.  Sketch  the  form  of  a  bond  ledger  which  will  provide  the  purchaser  of 
these  bonds  with  a  perpetual  detail  record  of  this  bond  transaction. 

55 


PROBLEM  79 
(Florida,  1915) 

A  company  purchased  a  piece  of  real  estate  for  $100,000.00.  The  terms  of 
payment  agreed  upon  were  $10,000.00  each  year  thereafter,  without  interest, 
until  the  whole  $100,000.00  was  paid.  At  the  end  of  the  fourth  year,  twelve 
months  before  the  fifth  payment  was  due,  the  company  found  itself  possessed 
of  considerable  available  cash,  and  decided  to  relieve  itself  of  the  liability 
specified  by  depositing  one  amount  sufficient  to  pay  the  annual  installment's 
as  they  matured.  The  bank  agreed  to  pay  5  per  cent,  per  annum  on  all  money 
deposited  for  that  purpose. 

What  is  the  single  amount  which  the  company  must  deposit  at  5  per  cent. 
to  pay  the  yearly  installments  as  they  mature? 

PROBLEM  80 
(Kansas  and  Missouri,  1915) 

The  present  value  of  an  annuity  of  $1.00  for  four  periods  at  2  per  cent,  is 
$3.80772870. 

What  is  the  value  on  January  1,  1914,  of  a  5  per  cent,  per  annum  bond 
issue  of  $100,000.00,  bought  on  a  4  per  cent,  per  annum  basis  (semi-annual 
coupons),  due  January  1,  1916? 

Prepare  amortization  table  as  follows : 

Date  Total  Interest      »    Income  Amortization  Book  Value  Par 

2J^%  2%  $100,000.00 

Jan.  1,  1914 
July  1,  1914 
Jan.  1,  1915 
July  1,  1915 
Jan.  1,  1916 

Insert  values  under  the  various  heads  to  the  nearest  cent. 

PROBLEM  81 
(Michigan,  December,  1915) 

A  contractor  proposes  to  build  a  bridge  to  Belle  Isle  and  accept  the  city's 
4  per  cent  20-year  bonds  to  the  amount  of  $2,000,000.00  in  payinent.  He  ad- 
vocates as  a  means  of  retiring  the  bonds  the  establishment  of  a  toll  system 
on  foot  passengers  and  automobiles  at  the  respective  rates  of  1  and  5  cents 
each.  Assuming  the  ratio  of  foot  passengers  to  automobiles  to  be  ten  to  one, 
how  many  of  each  would  be  necessary  to  pay  the  interest  annually  and  create 
a  fund  which,  placed  at  the  same  rate  of  interest^  would  be  sufficient  to  retire 
the  bonds  at  maturity? 

Note:    $1.00  compounded  at  4  per  cent,  for  20  years==2.191 12314. 

PROBLEM  82 

The  X  Company  is  to  be  formed  with  a  total  capitalization  of  $3,300,000.00 
for  the  purpose  of  acquiring  the  properties  of  three  companies — A,  B  and  C. 
You  have  been  called  upon  to  work  out  various  bases  of  consolidation  from 
the  facts  which  they  submit  to  you.  The  average  net  assets  and  the  average 
annual  net  profits  of  each  company  for  the  past  five  years  are  as  follows : 

ABC 

Average  Net  Assets $500,000.00      $1,000,000.00        $180,000.00 

Average  Net  Profits 53,000.00  93,000.00  32,400.00 

56 


Upon  inquiry  you  find  that  the  average  net  profit  was  obtained  from  the 
following  average  operating  statements  of  the  three  companies: 

ABC 
Sales   $600,000.00    $750,000.00    $200,000.00 

Cost  of  Materials  Used $300,000.00  $330,000.00     $  80,000.00 

Productive  Labor  : 110,000.00  180,000.00  34,900.00 

Heat,  Light  and  Power 5,000.00  6,000.00  3,000.00 

Depreciation   of   Equipment 10,000.00  8,000.00  5,000.00 

Repairs  to  Equipment 7,500.00  5,000.00  5,000.00 

Property  Taxes  2,000.00  2,500.00  1,000.00 

Sundry   Factory    Expenses 5,500.00  5,000.00  2,000.00 

Total  Factory  Cost $440,000.00    $536,500.00    $130,900.00 

Gross  Manufacturing  Profit $160,000.00     $213,500.00     $69,100.00 

Selling  Expenses    60,000.00        90,000.00         15,000.00 

•  ^ 

Trading  Profit $100,000.00    $123,000.00     $  54,100.00 

Office  Salaries  20,000.00        25,000.00  6,500.00 

Office  Supplies 2,000.00  3,000.00  500.00 

Sundry  Office  Expense 8,000.00         10,000.00  4,800.00 

Net  Operating  Profit $  60,000.00     $  60,000.00    $  32,400.00 

Interest  Paid   $     5,000.00  $     1,000.00  $     1,000.00 

Discount  on  Sales 12,000.00  6,000.00  2,000.00 

Interest  Received  500.00  750.00  1,000.00 

Discount  on   Purchases 8,500.00  8,250.00  2,000.00 

Anticipated  Profits  on  Contracts 5,000.00         

Profit  on  Sale  of  Stocks 1,000.00  26,000.00         

Net  Profits  ."...$  53,000.00    $  93,000.00    $  32,400.00 

PROBLEM  83 
(Illinois,  May,  1914) 

Assume  a  scheme  was  on  foot  fpr  the  consolidation  of  six  competitive  man- 
ufacturing companies  engaged  in  the  same  line  of  business,  and  that  you  were 
invited  to  formulate  a  scheme  for  the  valuation  of  the  good  will  and  assets 
of  the  respective  companies  that  would  be  fair  and  equitable  to  all  parties. 
Outline  generally  the  plan  you  would  recommend,  dealing  specifically  and 
separately  with  (a)  good  will ;  (b)  plant  and  equipment ;  (c)  inventories  of 
raw  material,  work  in  process  and  finished  stock,  respectively;  and  (d)  ac- 
counts and  bills  receivable. 

PROBLEM  84 
(Wisconsin,  1915) 

In  a  report  upon  a  proposed  amalgamation  of  two  companies,  state  how  you 
would  treat  the  following  points  in  arriving  at  the  earning  power  of  each 
concern.     Give  reasons  for  your  treatment: 

(a)  Anticipated  profits  on  contracts  in  process. 

(b)  Interest  paid  on  borrowed  capital. 

(c)  Insurance  of  any  description. 

(d)  Wages  paid  general  workmen. 

(e)  Salaries  paid  officers  and  directors. 

(f)  Depreciation  of  plant  and  equipment. 

67 


(g)  Bad  debt  reserves. 

(h)  Repairs,  renewals  and  replacement  of  plant  and  equipment. 

(i)  Taxes. 

(j)  Audit  and  legal  fees. 

PROBLEM  85 
(Wisconsin,  1918) 

The  directors  of  the  Charles  Manufacturing  Company  decide  to  change 
their  plan  of  capitalization  by  retiring  their  common  stock  and  issuing  pre- 
ferred stock  and  new  common  stock  in  place  of  it.  On  December  31,  1917, 
their  books  showed  $1,000,000.00  common  stock  and  $300,000.00  surplus.  The 
new  plan  offered  each  common  stockholder  1.3  shares  of  preferred  stock  and 
1  share  of  new  common  stock  for  each  share  of  old  common  stock,  fractional 
shares  amounting  to  $6,400  to  be  redeemable  in  cash.  Amendments  to  the 
articles  of  incorporation  were  duly  made  providing  an  authorized  amount  of 
$1,500,000.00  of  preferred  stock  and  $2,000,000.00  of  common  stock.  On  April 
1  all  exchanges  had  been  completed,  with  the  following  exceptions :  Unissued 
common  stock,  1,000  shares;  unissued  preferred  stock,  1,300  shares;  frac- 
tional shares,  $300.00.  The  par  value  of  each  kind  of  stock  is  $1(J0.00  per 
share. 

Draft  the  necessary  journal  entry  or  entries  to  record  the  above  changes. 

PROBLEM  86 
(Illinois,  May,  1913) 

In  making  up  a  consolidated  balance  sheet  of  a  holding  or  parent  company 
and  two  subsidiary  companies,  where  in  case  of  one  of  the  subsidiary  com- 
panies its  entire  capital  stock  has  been  acquired  at  less  than  par,  and  in  the 
case  of  the  other  at  a  substantial  premium,  how  would  you  deal  with  such 
discount  and  premium,  respectively,  in  the  consolidated  balance  sheet? 

In  the  event  that  all  the  stock  of  the  subsidiary  companies  was  not  owned 
by  the  parent  company,  how  should  such  proportions  of  said  stock  belonging 
to  the  minority  stockholders,  together  with  the  proportion  of  surplus  apper- 
taining thereto,  be  stated  in  the  balance  sheet? 

PROBLEM  87 

(Illinois,  May,  1913) 

A  parent  company  holding  notes  receivable  from  a  subsidiary  company  to 
the  extent  of  $100,000.00  indorses  and  discounts  said  notes  with  its  bankers, 
thus  creating  a  contingent  liability  thereunder.  In  preparing  a  consolidated 
balance  sheet  of  the  two  companies,  state  how  and  where  the  liability  would 
appear. 

PROBLEM  88 

(New  York,  June,  1915) 

Two  concerns  failed,  owing  each  other  money,  the  amounts  of  which  were 
included  in  their  respective  Accounts  Payable  accounts.  A  summary  balance 
sheet  of  X,  which  is  accepted  as  correct,  is  as  follows: 

58 


balance  Sheet  o(  Firm  X 

Due   from   Y $  10,000.00  Due  to  Y $  40,000.00 

All  other  Assets 180,000.00  All  other  Liabilities 200,000.00 

Deficit    50,000.00 

$240,000.00  $240,000.00 

A  summary  balance  sheet  of  Y,  which  is  accepted  as  correct,  is  as  follows : 

Balance  Sheet  of  Firm  Y 

Due  from  X $  40,000.00  Due  to  X $  10,000.00 

All  other  Assets 160,000.00  All  other  Liabilities 270,000.00 

Deficit    80,000.00 

$280,000.00  $280,000.00 

The  court  holds  that  it  is  unfair  to  other  creditors  to  allow  such  firms  to 
strike  a  balance  between  their  respective  accounts  and  then  to  settle  with  the 
outside  creditors  on  a  percentage  basis.  Accordingly,  it  is  necessary  to  obtain 
the  "ratio  of  solvency,"  i.  e.,  the  percentage  (how  many  cents  on  the  dollar) 
each  concern  will  be  able  to  pay  on  the  basis  of  the  respective  balance  sheets. 
Determine  this  "ratio  of  solvency"  for  each  firm. 

PROBLEM  89 
(Wisconsin,  1914) 

The  balance  sheet  of  the  Richard  Rowe  Manufacturing  Company  on  April 
1,  1913,  was  as  follows : 

Cash  $    5,000.00  Notes  Payable   $  30,000.00 

Notes  Receivable  20,000.00  Accounts  Payable    10,000.00 

Accounts  Receivable  50,000.00  Mortgage  on  Real  Estate 10,000.00 

Inv.  Raw  Materials 40,000.00  Capital  Stock 300,000.00 

Inv.  Jobs  in  Progress 25,000.00  Surplus    5,000.00 

Buildings,  Plant  &  Machinery.  120,000.00 

Real  Estate  Holdings 75,000.00 

Good  Will   20,000.00 


$355,000.00  $355,000.00 

April  1,  1914,  the  creditors  forced  the  company  into  bankruptcy  and  you 
have  been  employed  by  the  receiver  to  prepare : 

(a)  A  comparative  statement  of  the  book  values  of  the  assets  and  liabili- 
ties as  on  April  1,  of  both  years,  showing  the  changes  in  value  which  led  to 
bankruptcy.  This  statement  to  be  accompanied  with  your  comments  as  to 
changes  in  values. 

(b)  A  statement  of  affairs  and  deficiency  account. 

(c)  A  statement  as  to  the  approximate  dividends  the  creditors  may  ex- 
pect in  settlement  of  their  claims. 

You  obtain  the  following  facts  from  the  books  and  other  sources  of  infor- 
mation as  to  the  condition  of  Richard  Rowe  Manufacturing  Company  on 
April  1,  1914. 

The  capital  stock  has  been  reduced  to  $200,000.00. 

During  the  past  year  new  machinery  amounting  to  $20,000.00  was  pur- 
chased on  the  installment  basis,  $5,000.00  having  been  paid  on  installments 
to  date. 

The  accounts  receivable  total  $60,000.00,  of  which  $20,000.00  is  in  good 
accounts,  $20,000.00  is  in  doubtful  accounts  expected  to  realize  $10,000.00,  and 
the  remainder  is  considered  worthless. 

59 


A  loan  of  $15,000.00  was  obtained  from  friends  by  giving  a  mortgage  on 
certain  real  estate,  the  book  value  of  which  is  $25,000.00. 

Other  notes  payable  to  the  amount  of  $25,C)00.00  are  outstanding,  $10,- 
000.00  of  which  is  fully  secured  by  a  mortgage  on  certain  real  estate,  the  book 
value  of  which  is  $15,000.00. 

The  Notes  Receivable  Account  stands  on  the  books  at  $5,000.00,  but  notes 
receivable  and  not  yet  due  to  the  amount  of  $10,000.00  have  been  discounted. 
An  examination  of  these  discounted  notes  shows  that  one  of  $1,000.00  will  be 
dishonored.  The  $5,000.00  of  notes  receivable  on  the  books  will  realize 
$1,000.00. 

Orders  whose  selling  prices  total  $50,000.00  are  on  the  way  through  the 
factory.  The  cost  records  show  that  $20,000.00  has  already  been  spent  upon 
such  orders  and  it  is  estimated  that  $35,000.00  will  have  to  be  spent  to  com- 
plete them  ($5,000.00  of  materials  on  hand  are  included  in  the  $35,000.00 
estimate). 

There  is  $500.00  cash  on  hand  and  on  deposit. 

The  trade  accounts  payable  amount  to  $90,000.00. 

The  inventory  of  raw  materials  is  $15,000.00. 

Accrued  wages  of  the  past  month  total  $500.00. 

Taxes  amounting  to  $2,000.00  are  unpaid. 

The  value  of  the  buildings,  plant  and  old  machinery  (book  value  $120,- 
000.00)  is  appraised  at  $30,000.00. 

The  market  value  of  the  unmortgaged  real  estate  is  $5,000.00. 

The  real  estate  mortgaged  to  secure  the  $15,000.00  loan  will  only  meet  that 
claim  and  the  remaining  mortgaged  real  estate  will  bring  its  book  value  in  the 
open  market. 

Prepare  the  statements  for  the  receiver  in  proper  form. 


PROBLEM  90 

(Wisconsin,  1919) 

(a)  State  the  use  for  which  each  of  the  following  kinds  of  charts  are  best 
adapted  in  plotting  business  statistics : 

Line  or  curve  chart 
Bar  chart 
Circle  chart 
Area  chart 

(b)  On  the  cross  section  paper  given  herewith,  plot  the  following  sta- 
tistics : 

1.  Productive  and  Non-Productive  Labor: 

Productive  Labor  Non-Productive  Labor 

1918                 1919  1918                1919 

January    $  4,500.00        $  8,000.00  $  1,750.00        $4,000.00 

February    5,000.00          10,000.00  1,800.00          5,500.00 

March    4,000.00          10,500.00  1,800.00          5,500.00 

2.  Sales: 

Total  Sales  Sales  Quota 

Brown  Jones  Brown            Jones 

January    $10,000.00  $7,500.00  $12,000.00        .$7,000.00 

February    12,750.00  9,000.00  13,000.00          7,500.00 

March   15,000.00  8,000.00  13,500.00          9,000.00 

(c)  State  any  additional  information  necessary  for  proper  interpretation 
of  the  charts  which  you  have  just  prepared. 

60 


PART  II 

1.  (a)   What  is  meant  by  a  "classification  of  accounts"? 

(b)  What  different  plans  or  bases  are  there  for  classifying  accounts? 

(c)  Illustrate. 

(d)  Show  by  chart  or  outline  the  various  divisions  and  subdivisions 

of  all  asset,  liability,  income  and  expenditure  accounts. 

(e)  W'hat  are  the  advantages  obtained  through  numbering  accounts? 

(f)  Name  and  briefly  describe  two  methods  of  numbering  or  lettering 

accounts.     (Wisconsin,  1914.) 

2.  (a)   Define  and  distinguish  between  operating  and  non-operating  in- 

come and  expenses. 

(b)  State  the  several  classes  of  non-operating  income  and  expense  and 

give  illustrations  of  each. 

(c)  Distinguish    between    operating   expenses    and    maintenance    ex- 

penses. 

3.  Give  a  typical  operating  statement  for  a  small  mercantile  concern, 
using  your  own  accounts  and  amounts. 

4.  Give  the  items  which  are  to  be  found  in  the  operating  statement  of  a 
manufacturing  concern. 

5.  Mention  some  of  the  points  to  be  considered  in  the  interpretation  of 
the  revenue  account. 

6.  Discuss  three  methods  of  dealing  with  discounts  on  purchases  and  dis- 
counts on  sales. 

7.  What  form  of  the  revenue  account  is  used  in  the  columns  of  newspa- 
pers and  financial  publications? 

8.  Give  a  revenue  account  for  each  divisional  activity  of  a  business  with 
which  you  are  acquainted. 

9.  Define  and  distinguish  between  a  balance  sheet,  a  financial  statement, 
and  a  statement  of  assets  and  liabilities. 

10.  Name  and  describe  the  various  forms  of  balance  sheets  and  financial 
statements. 

11.  State  the  advantages  and  disadvantages  of  the  working  sheet. 

12.  What  is  meant  by  the  double  account  form  of  balance  sheet?  Should 
not  the  double  account  form  of  balance  sheet  be  applied  to  all  commercial 
enterprises? 

13.  Name  two  general  methods  of  arranging  the  items  in  balance  sheets. 
Explain  when  each  of  them  should  be  followed. 

14.  What  are  the  advantages  of  comparative  balance  sheets? 

15.  Build  up  a  typical  financial  statement  briefly  explaining  each  of  the 
items  mentioned  therein. 

16.  Define  depreciation. 

17.  Is  depreciation  an  operating  charge  or  a  division  of  the  net  profits? 

18.  Explain  how  depreciation  is  distinct  fi-om  fluctuation,  appreciation 
and  maintenance. 

19.  What  are  the  factors  to  be  considered  in  determining  the  rate  of  de- 
preciation? 

61 


20.  How  should  depreciation  be  recorded  upon  the  books  of  account? 

21.  Explain  how  a  Reserve  for  Depreciation  Account  and  a  Depreciation 
Fund  may  be  set  upon  the  books  for  the  writing  off  and  replacement  of  a  given 
asset.    Use  your  own  figures  to  illustrate  your  answer. 

22.  Assume  that  a  Reserve  for  Depreciation  Account  has  been  accumu- 
lated upon  the  books  amounting  to  $1,000.00,  and  that  a  Depreciation  Fund 
has  been  accumulated  of  a  like  amount,  both  for  the  purpose  of  writing  off  and 
replacing  an  asset  of  $1,000.00.  When  this  asset  of  $1,000.00  is  discarded,  the 
scrap  value  is  found  to  be  $100.00  and  an  asset  costing  $1,500.00  is  purchased. 
Give  entries  for  these  facts  upon  the  books  of  account,  and  show  exactly  how 
the  Reserve  for  Depreciation  Account,  the  Depreciation  Fund  and  the  Asset 
Account  stand  when  the  transactions  are  completed. 

23.  The  replacement  value  of  machinery  and  equipment  is  given  as  $225,- 
000.00  in  an  appraisal  recently  made  for  a  company ;  the  sound  value  as  $190,- 
000.00.  The  book  value  of  the  machinery  and  equipment  is  $240,000.00,  and 
the  Reserve  for  Depreciation,  Machinery  and  Equipment  Account  is  credited 
with  $49,000.00. 

(a)  Give  the  necessary  journal  entry  or  entries  which  Avill  record  the 

proper  facts  upon  the  ledger. 

(b)  State  the  practice  which  the  company  evidently  has  followed  in 

recording  the  purchases  of  new  equipment. 

(c)  Outline  a  system  for  having  data  available  in  compact  form  rela- 

tive to  the  original  cost,  repair,  replacement  and  depreciation  of 
equipment,  and  state  the  relationship  of  such  system  to  the  gen- 
eral financial  accounts.     (Wisconsin,  1918.) 
24      A  mill  sells  a  lot  of  its  old  machinery  for  $7,300.00  and  credits  the 

amount  to  "Repairs"  Account.     State  (a)  your  opinion  thereof,  and  (b)  the 

reasons  supporting  your  answer.     (Massachusetts,  1911.) 

25.  (a)   State  the  basis  for  determining  the  depreciation  charge  under 

each  of  the  following  methods : 

1.  Fixed  Proportion. 

2.  Fixed  Percentage. 

3.  Sum  of  Year  Digits. 

4.  Composite  Life. 

5.  Annuity. 

6.  Sinking  Fund. 

(b)  State  whether  a  constant,  an  increasing,  or  a  decreasing  depre- 
ciation charge  is  obtained  from  the  use  of  each  of  the  six  meth- 
ods given  under  (a).     (Wisconsin,  1917.) 

26.  A  water  company  finds  it  necessary  to  renew  a  line  of  service  mains 
which  cost  $50,000.00  seven  years  ago.  Double  capacity  is  now  advisable,  for 
which  the  outlay  will  be  $80,000.00.  Depreciation  at  10  per  cent,  per  annum 
has  been  regularly  charged  on  the  first  installation. 

Draft  the  necessarv  journal  entries  to  meet  the  essential  facts.  (Illinois. 
May,  1912.) 

27.  Define  Good  Will. 

28.  When  should  Good  Will  be  considered? 

29.  Discuss  the  points  to  be  considered  in  placing  a  valuation  upon  Good 
Will. 

30.  Explain  the  meaning  of  the  word  "Purchase"  as  applied  to  Good  Will. 

31.  Should  Good  Will  be  kept  upon  the  ledger  as  a  fixed  account  or  should 
it  be  written  down  each  year? 

C>2 


32.  At  the  time  of  taking  inventories  and  closing  its  accounts  preparatory 
to  ascertaining  its  financial  condition,  a  corporation  has  obligations  under 
contracts  to  pay  for  raw  materials  to  arrive  on  which  no  payments  have  been 
made.  At  the  time  of  closing  the  accounts  the  prices  of  the  contracts  are  in 
excess  of  the  market  prices  for  deliveries  corresponding  with  the  contracts. 
State:  (a)  how  this  condition  should  be  reported  in  the  accounts  and  state- 
ment of  financial  condition,  and  (b)  your  reasons.     (Massachusetts,  1911.) 

33.  The  manager  of  a  branch  store  received  instructions  from  his  head 
office  to  forward  the  inventory  of  December  31,  1917,  at  cost  and  selling 
prices.  He  asks  you  to  prepare  the  statement,  since  past  reports  have  been 
based  on  sales  ofily.  These  prices  include  a  profit  of  20  per  cent.  The  data 
with  which  he  supplies  you  are  as  follows : 

Inventory,  January  4.  1918.  $98,000.00. 

Merchandise  received  December  31.  1917.  to  January  4,  1918,  $1,000.00. 

Sales  for  this  period,  $1,200.00. 

34.  In  examining  the  business  to  determine  and  show  separately  the 
profits  for  two  years  ending  December  31,  1916,  it  is  found  that  an  item 
amounting  to  $500.00  has  been  omitted  from  the  inventory  of  December  30, 
1914,  that  an  error  has  been  made  in  the  footing  of  the  inventory  of  December 
31,  1915,  by  which  that  inventory  was  overstated  to  the  amount  of  $250.00, 
and  that  in  pricing  the  inventory  of  December  31.  1916.  an  error  was  m^de  by 
which  that  inventory  was  understated  to  the  amount  of  $1,000.00.  State  fullv 
the  effect  of  these  errors  on  the  profits  of  each  of  the  two  years.  (Louisiana, 
1917.) 

35.  It  is  generally  conceded  that  merchandise  inventories  should  be  cal- 
culated on  "cost"  prices,  but  in  practice  there  are  found  many  differences  in 
the  method  of  determining  the  cost  price. 

State  whether  or  not  the  following  items  should  be  regarded  in  arriving  at 
this  cost,  giving  your  reason  in  each  case: 

Cash  Discounts. 

Trade  Discounts. 

Freight  Inward. 

Freight  Outward. 

Rebates  and  premiums,  such  as  are  found  in  connection  with  the  tobacco 
business. 

Draying  and  handling  (inward V 

Packing  and  draying  (outwardV     (Florida.  1915.) 

36.  (a)   Upon  what  theory  is  the  maxim  based  that  inventories  should  be 

valued  at  cost  or  market  value,  whichever  is  lower  at  the  date 
of  the  balance  sheet ;  and  under  what  circumstances,  if  any.  is 
it  permissible  to  value  raw  materials  at  market  prices  for  bal- 
ance sheet  purposes,  where  said  market  prices  are  in  excess  of 
cost  owing  to  a  gradual  or  sudden  rise  in  prices  after  the  ma- 
terials were  purchased? 
(b)  Assuming  an  automobile  manufacturing  company  made  a  con- 
tract for  rubber  tires  at  $35.00  each  with  the  understanding 
that  it  was  to  receive  a  rebate  of  $5.00  a  tire  if  the  purchases 
exceeded  40,000  tires,  and  that  at  the  end  of  the  season  when 
the  accounts  were  made  up.  say  on  July  31.  it  was  found  that 
45,000  tires  had  been  purchased  and  a  claim  for  the  rebates 
were  thereupon  made  and  a  check  in  settlement  was  received 
on  August  31  following.  On  July  31  there  were  15.000  tires 
on  hand.     At  what  price  should  they  be  valued  for  mventor}' 

i63 


purposes,  and  how  should  the  rebate  be  dealt  with  in  the  ac- 
counts for  the  year  ending-  July  31?     (Illinois,  1914.) 
2>7.     Define  a  partnership.    With  what  phases  of  the  partnership  organiza- 
tion and  accounts  is  the  accountant  most  concerned? 

38.  State  the  accounting  clauses  which  should  be  in  partnership  agree- 
ments. 

39.  Why  is  it  necessary  for  partners  to  have  Investment  (or  Capital) 
and  Drawing  (or  Personal)  accounts?  Show  the  relationship  which  exists 
between  them. 

40.  State  and  explain  at  least  three  methods  of  dividing  the  profits  or 
losses  of  a  partnership. 

41.  Explain  why  interest  on  investment  is  frequently  allowed  in  part- 
nerships. 

42.  .Show  the  eflfect  of  not  allowing  for  interest  on  investments  in  part- 
nerships. 

43.  If  capital  investments  are  equal  but  profits  and  losses  are  divided  un- 
equally, and  if  interest  on  investment  is  not  allowed,  which  partner  loses? 
Illustrate  your  answer  with  figures. 

44.  If  profits  are  divided  equally,  but  capital  investments  are  unequal, 
and  if  interest  on  investment  is  not  allowed,  which  partner  loses?  Illustrate 
your  answer  with  figures. 

45.  If  capital  investments  are  equal,  and  profits  and  losses  are  divided 
equally,  what  is  the  eflfect  of  allowing  for  interest  on  investment?  Illustrate 
your  answer  with  figures. 

46.  Explain  how  interest  on  investment  may  be  credited  directly  to  the 
partners'  accounts  rather  than  be  thrown  into  an  interest  account,  closed  into 
profit  and  loss,  and  then  transferred  to  the  partners'  accounts. 

47.  Explain  at  least  three  methods  of  admitting  a  new  partner.  Illustrate 
your  answer  with  figures. 

48.  When  a  partnership  is  dissolved,  how  are  assets  distributed? 

49.  Explain  how  profits  or  losses  resulting  from  a  partnership  dissolution 
should  be  borne  by  several  partners. 

50.  The  following  is  a  trial  balance  of  the  general  ledger  of  a  partnership 
in  which  the  profits  are  shared  equally  at  the  end  of  the  first  year  of  its 
existence : 

Building   and    Equipment $6,000.00 

Merchandise  and  Materials 7,000.00 

Accounts    Receivable    4,000.00 

Profit  and  Loss  Account 5,700.00 

John  Smith,  Drawing  Account 2,500.00 

George  Jones,  Drawing  Account 1,300.00 

Arthur  Morris,  Drawing  Account 2,000.00 

John  Smith,   Capital  Account $10,000.00 

George  Jones,  Capital  Account 8,500.00 

Arthur  Morris,  Capital  Account 6,500.00 

Accounts   Payable    3.500.00 

The  firm  decided  to  sell  the  business  out  and  to  dissolve  the  partnership 
and  procured  a  purchaser  who  offered  the  sum  of  $50,000.00  for  the  business, 
including  good  will,  etc.  The  offer  was  ultimately  accepted  on  the  under- 
standing that  the  purchaser  would  assume  all  existing  liabilities,  which  he 
agreed  to  do,  and  the  sale  was  forthwith  consummated. 

State  how  the  proceeds  of  the  sale  should  be  apportioned  among  the  part- 

64 


ners,  showing  the  amount  each  would  receive.     (Illinois,  May,  1914.) 

51.  A  corporation  manufacturing-  explosives  is  compelled  to  pay  exorbi- 
tant rates  for  a  very  limited  amount  of  insurance,  and  in  consequence  was 
obliged  to  install  an  automatic  sprinkler  system  at  a  cost  of  $75,000.00.  This 
additional  fire  protection  enabled  them  to  secure  a  full  line  of  insurance, 
though  in  mutual  companies,  and  at  a  much  lower  rate  than  was  obtainable 
prior  to  such  installation.  At  the  end  of  the  fiscal  year  the  company  received 
dividends  from  these  mutual  insurance  companies  aggregating  $2,000.00.  To 
what  account  should  the  cost  of  the  sprinkler  system  be  charged  and  to  what 
account  should  this  dividend  be  credited?  State  your  reasons  fully.  (Louisi- 
ana, 1917.) 

52.  A  clothing  store  carries  fire  insurance  to  the  amount  of  $30,000.00  on 
a  stock  of  $50,000.00.  The  policies  contain  the  80  per  cent,  co-insurance 
clause.  State  (a)  the  amount  collectible  if  a  partial  loss  of  $15,000.00  were 
suffered,  and  (b)  the  amount  collectible  if  a  total  loss  occurred. 

(c)  If  you  believe  that  a  merchant  should  carry  one  hundred  per  cent, 
insurance  protection  upon  his  property,  draft  the  entry  or  entries  to  record  the 
annual  insurance  charge.  Assume  that  it  is  only  necessary  for  him  to  carry 
80  per  cent,  in  outside  companies  to  take  advantage  of  the  co-insurance  clause. 
(Wisconsin,  1918.) 

53.  A  fire  in  a  manufacturing  concern  resulted  in  a  loss  on  machinery 
$5,000.00,  merchandise  (raw  material)  $10,000.00,  manufactured  goods  $25,- 
000.00.  which  amount  of  $40,000.00  was  agreed  on  and  paid  by  the  insurance 
companies.  Give  the  entries  necessary  to  record  properly  the  above  transac- 
tions on  the  books  of  the  concern.     (New  York,  1914.) 

54.  The  Insurance  Account  as  kept  upon  the  books  of  the  Good  Merchan- 
dise Company  is  charged  with  the  premiums  paid  on  the  following  kinds  of 
insurance:  Fire  Insurance  on  Buildings.  Merchandise  and  Fixtures; 
Sprinkler  Leakage ;  Employer's  Guarantee  Bond ;  Safe  Burglary :  Robbery 
and  Hold  Up ;  Automobile  Fire.  Theft  and  Liability ;  General  Liability ;  Ele- 
vator Liability ;  Steam  Boiler ;  Tornado ;  Plate  Glass ;  Use  and  Occupancy ; 
Insurance  on  Officers'  Lives. 

You  are  asked  to  indicate  the  proper  treatment  to  be  given  each  of  the 
a1)Ove  items;  i.  e..  indicate  the  name  of  the  account  or  accounts  to  which  they 
should  be  charged,  give  the  adjusting  entries,  state  the  section  of  the  revenue 
account  or  income  statement  in  w^hich  each  would  appear,  etc.  (Wisconsin, 
November,  1919.) 

55.  The  partnership  "Black  &  White"  has  insured  the  lives  of  its  partners 
for  equal  amounts.  The  policies  are  payable  to  the  firm.  Premiums  have 
been  paid  for  five  years,  (a)  Show  the  annual  entries  for  each  of  the  five  years. 

At  the  end  of  the  fifth  year  "White"  dies,  (b)  What  would  be  the  proper 
entries  to  make  upon  receipt  of  the  amount  of  the  policy?    (Wisconsin,  1915.) 

56.  Should  a  corporation  borrow  money?  What  percentage  of  the  capital 
employed  by  a  corporation  is  usually  borrowed  money? 

57.  Explain  why  a  corporation  should  borrow  money,  illustrating  it, 
using  your  own  figures. 

58.  What  are  the  three  general  sources  from  which  a  corporation  may 
borrow  money?  Explain  the  types  of  the  security  given  according  to  the 
sources  of  the  funds  obtained. 

59.  Define  a  mortgage  bond ;  a  debenture  bond :  an  income  bond ;  a  col- 
lateral trust  bond. 

60.  The  stockholders  of  a  corporation  authorize  an  issue  of  $1,000,000.00 

65 


of  bonds;  $500,000.00  of  these  bonds,  duly  registered  and  certified  by  the  trus- 
tee, v/ere  returned  to  the  corporation  and  disposed  of  as  follows : 

The  corporation  sold  $200,000.00  for  cash,  pledged  $200,000.00  as  collateral 
security  for  the  payment  of  its  notes,  and  retained  $100,000.00. 

How  should  this  issue  of  bonds  appear  on  the  balance  sheet  of  the  cor- 
poration?   (New  York,  January,  1914.) 

61.  What  is  a  sinking  fund? 

62.  Assuming  that  a  corporation  has  issued  $100,000.00  of  ten-year  first 
mortgage  bonds,  and  that  the  trust  deed  provides  that  there  shall  be  set  aside 
annually  an  amount  sufficient  to  redeem  the  bonds  at  maturity,  give  the 
necessary  journal  entries  attending  the  issuance  of  the  bonds,  the'  annual  en- 
tries, and  the  final  entries  when  the  bonds  are  redeemed. 

63.  (a)  Compare  the  serial  plan  of  bond  redemption  with  the  sinking  fund 
method.     Which  is  preferable  and  why? 

(b)  A  municipality  has  built  a  public  building  from  the  proceeds  of  a 

bond  issue.    Should  the  municipality  write  off  depreciation  on 
the  building  and  at  the  same  time  also  create  a  sinking  fund? 

(c)  State  the  various  ways  of  calculating  contributions  to  a  sinking 

fund. 

(d)  How  may  sinking  funds  be  invested? 

(e)  How  may  a  sinking  fund  appear  upon  a  balance  sheet? 

(f)  Discuss  the  disposition  of  a  sinking  fund  reserve  account  which 

is  no  longer  necessary. 

(g)  Are  sinking  fund  reserve  appropriations  a  satisfactory  protection 

to  the  bondholder?     (Wisconsin,  1916.) 

64.  (a)  The  present  tendency  of  industrial  corporations  seems  to  be  to 
issue  preferred  stock  rather  than  bonds.  As  evidence  of  your  familiarity  with 
this  tendency,  you  are  asked  to  detail  the  more  important  of  typical  prefer- 
ential and  protective  features  of  preferred  stocks  now  being  marketed.  Enu- 
merate some  of  the  reasons  why  the  public  would  buy  such  preferred  stock 
rather  than  bonds. 

(b)  Compare  the  sinking  fund  provisions  of  typical  preferred  stock 
issues  with  the  sinking  fund  provisions  of  typical  bond  issues 
as  to  entries  to  be  made : 

1.  When  the  sinking  fund  is  set  up. 

2.  When  the  purpose  of  creating  the  sinking  fund  has  been  at- 

tained. 

3.  When  any  balances  remain  in  the  sinking  fund  or  allied  ac- 

counts.    (Wisconsin,  November,  1919.) 

65.  What  is  the  distinction  between  appropriated  and  free  surplus? 

66.  Is  discount  on  bonds  a  capital  or  a  revenue  charge?  Is  premium  on 
bonds  a  credit  to  capital  or  to  revenue? 

67.  What  does  the  Interstate  Commerce  Commission  require  in  connec- 
tion with  the  recording  and  the  financial  presentation  of  premiums  and  dis- 
counts on  bonds,  and  the  premiums  and  discounts  on  stocks?  State  the  theo- 
retic reason  for  the  difference,  if  any,  in  the  handling  of  these  two  classes  of 
facts.     (New  York,  January,  1914.) 

68.  In  auditing  the  books  of  a  corporation,  you  discover  that  a  portion  of 
its  capital  stock  has  been  sold  at  a  premium  and  the  premium  utilized  for  the 
payment  of  dividends. 

(a)  What  criticism  of  this,  if  any,  would  you  make  in  your  report? 

66 


(b)  Had  this  company  acquired  treasury  stock  at  par  and  sold  it  at 
a  premium,  utilizing  the  premium  for  the  payment  of  divi- 
dends, would  your  criticism  be  the  same?  Why?  (Ohio, 
1918.) 

69.  Define  amortization.  State  three  methods  of  accounting  for  the  pre- 
mium or  discount  on  stocks  and  bonds.     Which  is  preferable,  and  why? 

70.  A  firm  purchased  ten  $1,000.00  bonds  at  97>4,  due  January  1,  1915, 
bearing  5  per  cent,  interest,  payable  semi-annually.  What  procedure  would 
you  adopt  to  care  for  the  discount  at  maturity?     (New  York,  January,  1914.) 

71.  A  corporation  decided  to  issue  and  sell  bonds  to  the  amount  of  $100,- 
000.00  par  value.  The  denomination  of  such  bonds,  $1,000.00  each;  terms  of 
bonds,  fifteen  (15)  years;  interest  rate  5  per  cent,  payable  semi-annually.  On 
January  1,  1914,  these  bonds  were  sold  for  $105,411.33,  or  on  a  4>4  per  cent, 
return  basis.    July  1,  1914,  interest  was  paid  amounting  to  $2,500.00. 

(a)  What  entry  should  the  corporation  have  made  when  the  bonds 

were  sold? 

(b)  What  entry  should  the  corporation  have  made  when  it  paid  the 

$2,500.00  interest  referred  to  above? 

(c)  What  entry  should  the  purchaser  of  these  bonds  have  made  when 

he  received  the  first  interest  payment? 

(d)  Sketch  the  form  of  a  bond  ledger  which  will  provide  the  pur- 

chaser of  these  bonds  with  a  perpetual  detail  record  of  this 
bond  transaction.     (Wisconsin,  1915.) 

72.  Define  capitalization.        i 

7Z.  What  bases  are  used  in  det^ermining  the  capitalization  of  a  corpora- 
tion? 

74.  Discuss  in  detail  the  earning  power  basis  for  capitalizing  corpora- 
tions. 

75.  Is  there  a  distinction  between  watered  stock  and  stock  covered  by 
the  earning  power  but  not  by  physical  assets? 

76.  Discuss  the  subject  of  consolidation  of  corporations. 

77 .  A  financing  corporation  which  had  paid  $450,000.00  for  six  patents  of 
equal  value  sold  one  of  these  patents  during  the  first  year  of  its  existence  and 
received  as  the  consideration  for  the  sale  1,500  shares  of  preferred  stock  (par 
value  $100.00)  in  a  subsidiary  company  organized  for  the  purpose  of  working 
the  patent.  During  the  second  year  of  its  life  the  financing  corporation  sold 
the  1,500  shares  of  preferred  stock  for  $100,000.00.  State  how  you  would 
treat  the  accounts  in  respect  to  these  two  transactions  in  the  financing  cor- 
poration at  the  end  of  the  first  and  second  years,  respectively.  (North  Da- 
kota, 1918.) 

78.  In  the  general  ledger  of  a  corporation  is  a  controlling  account  for 
the  Accounts  Receivable;  the  individual  accounts  relating  thereto  being  kept 
in  an  Accounts  Receivable  ledger.  The  balance  of  the  controlling  account  is 
$550,000.00.  The  total  of  the  balances  at  the  debit  of  the  individual  accounts 
is  $590,000.00;  the  total  of  the  balances  at  the  credit  of  the  individual  accounts 
is  $40,000.00.  The  corporation  issues  to  banks  a  balance  sheet  showing  its  ac- 
counts receivable  as  $550,000.00.  State  (a)  whether  you  approve  of  same; 
(b)  if  you  differ,  what  you  would  enter  in  the  balance  sheet;  and  (c)  your 
reasons.     (Massachusetts,  1911.) 

79.  The  amount  of  outstanding  accounts  receivable  by  a  selling  house  for 
account  of  a  consignor,  whose  account  is  unguaranteed,  is  $762,000.00;  the 

67 


selling  house  had  advanced  thereon  to  the  consignor  $80,000.00.  The  con- 
signor shows  in  his  balance  sheet :  "Outstanding  accounts  receivable,  $682,- 
000.00,"  as  embracing  the  above.  State  (a)  your  opinion  of  the  propriety 
thereof,  and,  if  you  would  treat  items  differently,  (b)  how  and  (c)  why. 
(Massachusetts,  1911.) 

80.  Should  a  manufacturing  concern  charge  its  goods  sent  to  branch 
houses : 

(1)  At  selling  price,  or 

(2)  At  the  prevailing  wholesale  price  of  the  same  or  similar  goods  in 

the  open  market,  or 

(3)  At  cost? 

State  advantages  and  disadvantages  of  each  method.     (Colorado,  1914.) 

81.  (a)  Explain  the  treatment  you  would  give  the  following  in  the  books 
of  account : 

(b)  State  the  counterbalancing  or  oflfsetting  accounts. 

(c)  Explain  how  they  would  appear  in  the  balance  sheet : 

(1)  Note  receivable  discounted. 

(2)  Actions  pending  against  your  client. 

(3)  Cumulative  preferred  dividends  payable. 

(4)  Liability  as  guarantor  for  third  parties. 

(5)  Liability  as  accommodation  signer  on  note. 

(6)  Contingent  liabilities  under  contracts. 

(7)  Unpaid  balances  on  contracts  not  yet  fulfilled. 

(8)  Collateral  in  possession  of  your  banker  to  secure  payment  of 

a  note.     (Wisconsin,  1915.) 

82.  You  are  engaged  to  verify  the  financial  statement  of  a  corporation 
after  the  books  and  accounts  have  been  closed.  Your  investigation  discloses 
the  fact  that  the  following  items  have  not  been  provided  for  on  the  books  and 
accounts  at  the  closing  date : 

1.  Unexpired  insurance  premiums. 

2.  Prepaid  interest  on  notes  payable. 

3.  Depreciation  on  buildings. 

4.  Excess  of  appraisal  over  book  value  of  machinery. 

5.  Sinking  fund  reserve  for  payment  of  bonds  called  for  by  the  trust 

deed. 

6.  Taxes  for  current  year  not  payable  until  following  year. 

7.  Capital  stock  issued  in  payment  of  patent  rights  acquired. 

8.  Cash  surrender  value  of  life  insurance. 

9.  Accounts  payable  for  merchandise  in  transit. 

10.  Cash  discount  on  customers'  accounts  receivable. 
Prepare  the  journal  entries  necessary  to  adjust  the  accounts  in  conformity 
with  the  above  facts,  using  arbitrary  figures  and  explaining  the  reasons  for 
your  journal  entries.     (Missouri,  1916.) 

.  83.  State  your  opinion  on  the  use  of  diagrams,  charts  or  graphs,  giving 
at  least  three  methods  of  showing  diagrammatically  the  earnings  and  ex- 
penses of  a  mercantile  or  manufacturing  concern. 

State  how  you  would  prepare  curves  showing  the  monthly  results  accom- 

68 


pHshed,  and  what  particular  sets  of  figures  you  would  use  as  conveying  the 
most  important  information,  using  the  following  example: 

Gross  Sales   $320,000.00  per  annum 

Cost  of  Goods  Sold 260,000.00      ■ 

Expenses  of  Handling 30,000.00     " 

Expenses,  Overhead  10,000.00     " 

(Florida,  1915.) 

84.  A  manufacturer  finds  that  during  three  months  his  goods  have  cost 
per  cent,  on  the  sale  price : 

Raw  Material 30 

Wages    20 

Rent,  etc 05 

Fuel  10 

General   Expenses    15 

80 

What  should  he  add  to  his  selling  price  to  obtain  the  same  profit  if  the 
following  advances  take  place? 

Coal    50  per  cent,  advance 

Material   5  per  cent,  advance 

Wages    lYi  per  cent,  advance 

(Illinois,  1909.) 

85.  A  coal  mine  is  operated  under  a  twenty-year  lease  at  a  royalty  of  10 
cents  per  ton,  but  for  which  a  minimum  payment  of  $5,000.00  per  annum  must 
be  made.  After  the  third  year  an  arrangement  was  effected  between  the  lessor 
company  and  the  lessee  company  whereby  the  minimum  royalties  were  to 
apply,  if  in  excess  of  the  tonnage  mined,  against  future  operations.  In  the 
first  year  25,000  tons  were  mined;  in  the  second,  26,500;  in  the  third,  24,600; 
in  the  fourth,  31,000;  and  in  the  fifth.  30,500  tons.  Journalize  these  transac- 
tions and  state  how  the  respective  royalties  paid  would  affect  the  Profit  and 
Loss  Account  and  balance  sheet.     (Washington,  1917.) 

86.  John  Barton  leases  a  coal  mine  from'  Thomas  Sutton  upon  the  fol- 
lowing terms :  At  a  royalty  of  25  cents  a  ton  as  rental,  with  an  annual  mini- 
mum of  $500.00 — the  privilege  being  given  to  recover  "dead"  or  "unearned" 
minimum  rent  within  a  period  of  20  years. 

Draft  the  journal  entries  relative  to  the  following  output  for  five  years : 

1st     year    1,000  tons  2nd  year 2,500  tons 

3rd    year    4,500  tons  4th  year 1,800  tons  (strike) 

5th    year    3,800  tons 

(Illinois,  1912.) 

87.  The  Good  Music  Company  sells  pianos  on  the  installment  basis.  On 
January  2,  1914,  Jones  purchased  a  piano  from'  the  company  for  $375,  to  be 
paid  for  as  follows :  $25.00  down  and  the  balance  in  quarterly  installments  of 
$50.00  each,  bill  of  sale  to  be  given  on  date  of  final  payment.  The  piano  cost 
the  company  $125.00.  The  four  installments  for  1914  were  duly  received,  the 
last  one  having  been  paid  on  December  31st. 

(a)  Set  up  the  proper  ledger  accounts  covering  this  sale  and  the  pay- 

ments thereon. 

(b)  Give  the  journal  entry  (at  the  close  of  the  year)  by  which  the 

year  will  be  credited  with  its  proper  proportion  of  the  profit 
of  the  transaction. 

(c)  Sketch  the  ruling  of  a  book  or  books  which  might  be  used  to  facili- 

tate the  handling  of  installment  sales  and  collections.     (Wis- 
consin, 1915.) 

69 


88.  The  authorized  capital  stock  of  a  corporation  is  $500,000.00,  divided 
into  5,000  shares,  par  value  $100.00.  Of  this  amount  $400,000.00  has  been  sub- 
scribed and  paid  for  in  full.  The  corporation  purchases  ten  shares  of  a  dissat- 
isfied stockholder  for  $75.00  a  share,  and  five  other  stockholders  each  donate 
five  shares  to  the  company.  Five  shares  of  the  purchased  stock  and  all  of  the 
donated  stock  are  sold  for  $50.00  a  share. 

(a)  Draft  proper  entries  and  show  the  ledger  accounts  and  balances. 

(b)  How  would  the  balances  of  the  accounts  in  (a)  appear  in  a  bal- 

ance sheet? 

(c)  Give  the  entries  and  show  the  ledger  accounts  and  balances  if 

the  capital  stock  were  of  no  specified  par  value,  but  5,000 
shares  had  been  issued  at  $80.00  and  the  other  conditions  re- 
main as  stated  in  the  first  paragraph. 

(d)  How  would  the  balances  of  the  accounts  in  (c)  appear  in  a  bal- 

ance sheet?     (Wisconsin,  1917.) 

89.  A  corporation's  profits  for  the  year  ended  December  31,  1912,  amount 
to  $451,000.00.  The  by-laws  require  a  reserve  equal  to  10  per  cent,  of  any 
dividend  paid  to  the  common  stockholders,  and  any  surplus  remaining  after 
such  dividend  is  paid  is  also  to  be  applied  to  the  reserve  until  such  reserve  ac- 
count amounts  to  $250,000.00.  The  reserve  on  December  31,  1911,  was  $156,- 
020.00.  The  capital  is  $2,000,000.00 — one-half  cumulative  preference  5  per 
cent,  and  one  half  common,  all  fully  paid. 

On  December  31,  1912,  the  preferred  dividend  is  two  and  one-half  years  in 
arrears.  On  December  31,  1911,  Profit  and  Loss  Account  was  in  debit  $202,- 
000.00.  Set  out  your  treatment  of  the  profit  for  1912  with  a  few  concise  com- 
ments.   (Colorado,  1914.) 

90.  The  books  of  a  corporation  (with  a  capital  stock  of  $800,000.00)  at 
the  beginning  of  the  last  fiscal  year  showed  a  surplus  of  $28,450.00. 

During  your  examination,  immediately  subsequent  to  the  close  of  the  fiscal 
year,  you  learn  the  following  facts : 

That  the  net  profit  on  goods  delivered  to  customers  during  the  year 
amounted  to  $115,350.00. 

That  prior  to,  and  at  the  close  of  the  year,  the  company  owned  bona  fide 
contracts  for  the  delivery  of  goods  during  the  next  few  months. 

That  the  company  had  purchased  a  sufficient  quantity  of  merchandise  in 
order  to  fill  these  contracts. 

That  the  company,  after  making  due  allowances  for  all  production  cost, 
expenses  incidental  to  the  delivery  of  the  contract  goods,  cost  of  selling,  etc., 
had  arrived  at  a  net  profit  amounting  to  $51,120,  which  was  carried  to  Profit 
and  Loss  Account.    This  macie  a  total  net  balance  of  $166,470.00. 

That  there  was  declared  and  paid  a  dividend  of  20  per  cent  (or  $160,000.00) 
and  that  $6,470.00  was  carried  to  Surplus  Account. 

Would  you  consider  it  necessary  to  call  particular  attention  to  this  matter 
in  your  report  to  the  stockholders?    State  your  reasons.     (Wisconsin,  1914.) 

91.  A  corporation  has  two  classes  of  stock  fully  issued:  $5,000,000.00  7 
per  cent,  cumulative  preferred  as  to  dividend  and  assets;  10  per  cent,  divi- 
dends are  in  arrears.  $12,000,000.00  common,  on  which  no  dividend  has  been 
paid. 

The  corporation  proposes  to  retire  by  purchase  $2,000,000.00  common. 
What  would  be  the  effect,  if  any,  on  the  interests  of  the  preferred  stock- 
holders?   Give  reasons  supporting  your  answer.     (Massachusetts,  1911.) 

70 


92.  The  Jones  Manufacturing  Company,  needing  a  larger  building  for  its 
increasing  business,  finds  a  property  desirable  in  every  respect  excepting  that 
the  building  is  much  larger  than  is  necessary.  They  lease  the  property  at  an 
annual  rental  of  $18,000.00,  after  considering  that  they  can  probably  sub- 
lease part  of  the  building.  Owing  to  the  desirability  of  the  property  and  other 
favorable  conditions  they  execute  a  sub-lease  for  one-half  of  the  building  at 
an  annual  rental  of  $18,000.00.  How  would  you  treat  these  facts  in  compiling 
the  annual  income  statement  of  the  Jones  Manufacturing  Company.  (Wis- 
consin, 1915.) 

93.  A  manufacturing  company  ofFers  premiums  costing  75  cents  each  to 
its  customers  on  the  return  of  100  of  its  wrappers.  The  company  invested 
$5,000.00  in  premiums  and  sold  $500,000.00  units  of  the  commodity  during  the 
year.  You  find  that  300,000  of  the  wrappers  have  been  redeemed,  while  it  is 
estimated  that  20  per  cent,  will  not  be  presented  for  redemption.  At  the  end 
of  the  year  how  would  you  treat  this  matter  in  the  preparation  of  the  revenue 
account  and  balance  sheet?     (Wisconsin,  1915.) 


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